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Thursday, June 30, 2011

Howard Hollem Lone Star August 1942"Women from all fields have joined the production army. Miss Grace Weaver, a civil service worker at the Naval Air Base, Corpus Christi, Texas, and a schoolteacher before the war, is doing her part for victory along with her brother, who is a flying instructor in the Army. Miss Weaver paints the American insignia on repaired Navy plane wings"

All these things are for sale in Greece. As part of the IMF/ECB/EU bailout deal Athens voted in this week, this wholesale firesale of what amounts to something close to an entire public economy, is supposed to bring in €50 billion ($72 billion). And what will Greece be left with afterwards? They’d better come up with something good, because estimates are that the firesale will fall short by some 75%. Kerin Hope, Ralph Atkins and Gill Plimmer in the Financial Times:

The austerity measures call for an independent privatisation agency to be established within weeks to handle a programme of disposals, including the sale of strategic stakes in state- owned utilities and leases in state-owned property for tourist development. Independent research suggests, however, that Greece will struggle to raise much more than a quarter of the €50 billion it needs from the assets sales and privatisations unless it adds more prime land and cultural heritage to its sales list.

Only €13bn of assets are ready to sell, leaving a €37bn shortfall, says a study by the Privatisation Barometer, a Milan-based institute sponsored by Fondazione Eni Enrico Mattei and KPMG. This includes €6.6bn from offloading stakes in 15 listed groups and an "optimistic" €7bn from the sale of 70 unlisted groups, where the yields are more difficult to assess. "At this stage, no one really knows what Greece Inc is worth, but it’s clear that it will fall short," said Bernardo Bortolotti, a corporate finance professor at the University of Turin who produced the analysis.

Ilargi: Greece Inc. Put up for sale by a bunch of foreign governments and creditors and a government made up of domestic elites. Something here stinks. Did the IMF, ECB and EU really have no idea at all that the firesale sale profits would be far short of €50 billion? And if they did, which looks far more likely, what does that tell us? And what happens after that disppointing sale?

First, back to the reasons behind the expected firesale shortfall. Rupert Neate for the Guardian:

Nikos Stathopoulous, managing partner of BC Partners, which has invested more than €3.5bn in Greece, said investors are put off by bureaucracy, strong unions, corruption and a lack of transparency. "Even in the good times Greece is not a country that attracts investment. Foreign investors don't want to invest in a country where there is no flexibility in hiring and firing people," he said. "You don't want to invest in a country in which you wake up and a new law has been passed which totally undermines and destroys the value of the investment you've just made."

Stathopoulous said investors were finding it very hard to assess the risk of investing into Greece, which means assets "will be priced at lower than they are worth, lower than the Greek government, and even the European Union, expects". Aref Lahham, managing director and founding partner of Orion Capital Managers, said most private equity firms would not buy Greek assets because the "risks are too high". He added: "I think people will not buy those assets, that is the sad truth." [..]

Lahham said Greece's ambition to sell €15bn of assets by 2012 and the full €50bn by 2015 meant there was not enough time to carry out due diligence properly. "I simply do not believe the timescale. I'm afraid it is not going to happen within times - I'm afraid it is a fire sale."

Christodoulakis denied that the hastily arranged sell-off was a fire sale, preferring to describe it as a "professionally managed privatisation plan". "We may sell them cheaper than [during normal conditions] but we will devote the funds to buying back debt, that means we are going to buy it back when it is cheaper." When a fellow Greek interrupted to say the sell-off was "destroying our country", Christodoulakis said there was "no point crying over spilt milk" and told his countryman to "try and be optimistic".

Ilargi: Well, we stand corrected. It's not a fire sale, but a "professionally managed privatisation plan". Yeah, exactly. That's what stinks here. isn't it? That's where that familiar smell comes from. It has the fingerprints of the IMF all over it. All the way back to the economic warfare the institution initiated in South America, Asia, Eastern Europe, and everywhere it goes.

Greece has become the next chapter in Naomi Klein's The Shock Doctrine. Some of the faces at the IMF may have changed, but the blueprints for these kinds of operations are still the same; if anything, they've become even more perfected. Teams of economic hitmen and henchmen are sent into a country to sell everything that isn't nailed down to the highest bidder, but for the lowest price.

In order to achieve the last bit, all you need to do is write an agreement that is one on one contingent on an unrealistically high estimate of a group of assets, make sure their sale falls short of that estimate, and send in the hitmen again. And then you rinse and repeat until everything has been sold off. In Greece's case, it's all transport infrastructure first, because you know nobody really wants it, hence the sale price will be much lower than what the agreement called for, and in subsequent auctions you pick up the Acropolis and other national treasures.

Meanwhile, you raise taxes as much as you can, and then come back to do it again, while the public sector is gutted, along with health care, education and all those useless non-profitable parts of a society that benefit the people instead of the banks. Talking about banks, do we all still realize that all this is done to pay off debts to international banks that in many if not most cases would not even exist anymore if not for the tax revenues paid by the people of Greece, the rest of Europe, the US etc.? Or have we come to believe in "the recovery", do we now think it's real?

The reason the stock markets are up after the Greek austerity vote is that the IMF has managed yet another step in yet another step financial coup, and this one inside the European Union, no less. That offers great prospects for other weaker parts of Europe. If they can do it in Greece, they can do it in Ireland, Portugal, Spain, Italy. Unless people in one of these countries say NO, and a lot louder than the Greeks have done.

These things are set-ups. They have nothing to do with saving countries or their economies. They are plans to do the exact opposite: rape and pillage entire economies for the benefit of financial institutions. Read The Shock Doctrine, if you haven't yet, or re-read it if you have, and the patterns become grindingly clear.

The Lex team at the Financial Times may have put it best: Greece is -being- required to "carry out the impossible in order to stave off the inevitable". And it's required to do that on purpose. Thing is, Greece is by no means the first country where the Milton Friedman Chicago School's predatory "economic theories" wreak havoc and spill untold amounts of blood in the streets. It is the first in Europe, though. They're getting ever closer to what has always been the ultimate goal: remake America in the vein of their cannibalistic insanity.

Jim Puplava sits down with Nicole Foss for an in-depth two-part interview on the challenges she sees coming our way

Nicole Foss joins Jim Puplava on Financial Sense Newshour in the first of a two-part interview to talk about peak oil, the next financial crash, and the challenges she sees coming our way.Nicole is senior editor of The Automatic Earth, where she writes under the name Stoneleigh. She and her writing partner have been chronicling and interpreting the on-going credit crunch as the most pressing aspect of our current multi-faceted predicament. The site integrates finance, energy, environment, psychology, population and real politik in order to explain why we find ourselves in a state of crisis and what we can do about it.

The lights are still on in Athens. Greece’s parliament approved a proposal on Wednesday to pursue additional austerity and fiscal adjustment measures. The European Union and the International Monetary Fund can release €12bn of additional funding, enough to allow the government to repay debt maturing up to the end of August. The day of reckoning has been postponed.

The parliamentary vote was actually the second piece of good news on the Greek front this week. The first was that a French proposal to offer some private sector burden-sharing (with European banks reinvesting some maturing government bonds they hold in new, 30-year Greek paper) is gaining traction. If implemented, the proposal could see the potential cost to Europe’s banks of an eventual Greek default roughly halved from the widely accepted haircut figure of 70 per cent.

The French proposal is not policy, however, and will not amount to much if too few private sector investors sign up for it. And none of this week’s developments addresses the central issue of Greece’s insolvency. The success of Greece’s medium term fiscal strategy depends on an unlikely plan to sell €50bn of state assets. The government’s ability to implement the austerity measures must also be questioned: the vote in parliament was held to the sound of rioting and the smell of tear gas.

Throughout the eurozone crisis the EU has insisted that Greece carry out the impossible in order to stave off the inevitable. This approach cannot succeed indefinitely. Greece avoided an immediate and catastrophic default on Wednesday. But the problem of its enormous debt, and its inability realistically to finance itself for years to come, remain as intractable as ever. A default by Greece is likely regardless of what is done (or said). Policymakers and investors need to start planning for that uncomfortable fact.

George Provopoulos, the Bank of Greece governor, said the four-year austerity package to be voted on Wednesday by the Greek parliament puts too much emphasis on tax increases and not enough on spending cuts. Further questions have arisen, meanwhile, over sources of revenue for the state from its planned "fire sale" of assets – aiming to raise €50bn ($72bn) by 2015.

The austerity measures call for an independent privatisation agency to be established within weeks to handle a programme of disposals, including the sale of strategic stakes in state- owned utilities and leases in state-owned property for tourist development. Independent research suggests, however, that Greece will struggle to raise much more than a quarter of the €50 billion it needs from the assets sales and privatisations unless it adds more prime land and cultural heritage to its sales list.

Only €13bn of assets are ready to sell, leaving a €37bn shortfall, says a study by the Privatisation Barometer, a Milan-based institute sponsored by Fondazione Eni Enrico Mattei and KPMG. This includes €6.6bn from offloading stakes in 15 listed groups and an "optimistic" €7bn from the sale of 70 unlisted groups, where the yields are more difficult to assess. "At this stage, no one really knows what Greece Inc is worth, but it’s clear that it will fall short," said Bernardo Bortolotti, a corporate finance professor at the University of Turin who produced the analysis.

The Greek government has already privatised assets worth €25bn in banking, telecoms and energy since 1997, mostly in "salami-style" offerings of equity tranches in state-owned companies.

On Tuesday night, thousands of trade unionists gathered outside the parliament building on Syntagma Square, demanding withdrawal of the proposed privatisations. The Socialist government was struggling to rally dissident deputies with close ties to unions as debate on the measures continued ahead of the vote. Riot police used teargas against militants who attacked shops and set fire to rubbish bins in streets around the square as the unionists’ protest was breaking up.

A 48-hour walkout by public-sector workers shut down state-owned banks and government offices, city transport and most ferry services to the Aegean Islands. Work stoppages by air traffic controllers delayed dozens of international flights using Athens airport. The Indignant Citizens movement, running a Syntagma Square protest camp, asked supporters to stay in the streets throughout Tuesday and Wednesday.

Manolis, a civil engineering student, said: "This is the climax of a month-long protest against measures that are just too harsh for people to take ... We plan to be here nonstop." Theodoros Pangalos, deputy premier, said the next €12bn tranche from an international bail-out loan would not be disbursed unless parliament backed the new measures.

"If we don’t get the money, we face a terrible scenario ... a return to the drachma, with banks besieged by terrified crowds wanting to withdraw their savings," he said. "We will see tanks protecting banks because there won’t be enough police to do it."

While Greece erupted in protest again, representatives of the country's government were at Claridge's hotel trying to drum up international investors' interest in a "fire sale" of its national assets.

Up for sale are 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece's national lottery. George Christodoulakis, Greece's special secretary for asset restructuring and privatisations, said the sell-off would raise €50bn (£44bn) to help pay back the country's €110bn bailout debt.

The private equity bosses gathered in the hotel's ballroom for the parade of Greece's national treasures showed little interest in buying anything. Nikos Stathopoulous, managing partner of BC Partners, which has invested more than €3.5bn in Greece, said investors are put off by bureaucracy, strong unions, corruption and a lack of transparency. "Even in the good times Greece is not a country that attracts investment. Foreign investors don't want to invest in a country where there is no flexibility in hiring and firing people," he said. "You don't want to invest in a country in which you wake up and a new law has been passed which totally undermines and destroys the value of the investment you've just made."

Stathopoulous said investors were finding it very hard to assess the risk of investing into Greece, which means assets "will be priced at lower than they are worth, lower than the Greek government, and even the European Union, expects". Aref Lahham, managing director and founding partner of Orion Capital Managers, said most private equity firms would not buy Greek assets because the "risks are too high". He added: "I think people will not buy those assets, that is the sad truth."

Lahham said more than half of the assets up for sale comprises land for commercial or residential development, which is unattractive because of the difficulty of securing financing to build in Greece. His firm was attracted by the potential of Greek tourism but legislation made it difficult for foreign companies to develop the country's islands and beaches. "Greece is a fantastic tourism destination with very undeveloped infrastructure. There isn't a Four Seasons or a Shangri-La or a Peninsula or any of the major hotel chains in Greece," he said. "It's strange, they would love to be there and we would love to build it for them, but somehow regulations don't allow you to do so."

Lahham said Greece's ambition to sell €15bn of assets by 2012 and the full €50bn by 2015 meant there was not enough time to carry out due diligence properly. "I simply do not believe the timescale. I'm afraid it is not going to happen within times - I'm afraid it is a fire sale."

Christodoulakis denied that the hastily arranged sell-off was a fire sale, preferring to describe it as a "professionally managed privatisation plan". "We may sell them cheaper than [during normal conditions] but we will devote the funds to buying back debt, that means we are going to buy it back when it is cheaper." When a fellow Greek interrupted to say the sell-off was "destroying our country", Christodoulakis said there was "no point crying over spilt milk" and told his countryman to "try and be optimistic".

The Greek parliament is debating the latest set of austerity measures, which it needs to pass to qualify for another payment under the bail-out from the European Union and the International Monetary Fund.

The five-year plan was changed last week to allow for more money to be raised through tax increases and less money to be saved through spending cuts. The plan involves cutting 14.32bn euros ($20.50bn; £12.82bn) of public spending, while raising 14.09bn euros in taxes over five years. These are some of the austerity measures planned.

Taxation

Taxes will increase by 2.32bn euros this year, with additional taxes of 3.38bn euros in 2012, 152m euros in 2013 and 699m euros in 2014.

A solidarity levy of between 1% and 5% of income will be levied on households to raise 1.38bn euros.

The tax-free threshold for income tax will be lowered from 12,000 to 8,000 euros.

There will be higher property taxes

VAT rates are to rise: the 19% rate will increase to 23%, 11% becomes 13%, and 5.5% will increase to 6.5%.

The VAT rate for restaurants and bars will rise to 23% from 13%.

Luxury levies will be introduced on yachts, pools and cars.

Some tax exemptions will be scrapped

Excise taxes on fuel, cigarettes and alcohol will rise by one third.

Special levies on profitable firms, high-value properties and people with high incomes will be introduced.

Public Sector Cuts

The public sector wage bill will be cut by 770m euros in 2011, 600m euros in 2012, 448m euros in 2013, 300m euros in 2014 and 71m euros in 2015.

Nominal public sector wages will be cut by 15%.

Wages of employees of state-owned enterprises will be cut by 30% and there will be a cap on wages and bonuses.

All temporary contracts for public sector workers will be terminated.

Only one in 10 civil servants retiring this year will be replaced and only one in 5 in coming years.

Spending Cuts

Defence spending will be cut by 200m euros in 2012, and by 333m euros each year from 2013 to 2015.

Health spending will be cut by 310m euros this year and a further 1.81bn euros in 2012-2015, mainly by lowering regulated prices for drugs.

Public investment will be cut by 850m euros this year.

Subsidies for local government will be reduced.

Education spending will be cut by closing or merging 1,976 schools.

Cutting Benefits

Social security will be cut by 1.09bn euros this year, 1.28bn euros in 2012, 1.03bn euros in 2013, 1.01bn euros in 2014 and 700m euros in 2015.

There will be more means-testing and some benefits will be cut.

The government hopes to collect more social security contributions by cracking down on evasion and undeclared work.

The statutory retirement age will be raised to 65, 40 years of work will be needed for a full pension and benefits will be linked more closely to lifetime contributions.

Privatisation

The government aims to raise 50bn euros from privatisations by 2015, including:

Selling stakes this year in the betting monopoly OPAP, the lender Hellenic Postbank, port operators Piraeus Port and Thessaloniki Port as well as Thessaloniki Water.

It has agreed to sell 10% of Hellenic Telecom to Deutsche Telekom for about 400m euros.

Next year, the government plans to sell stakes in Athens Water, refiner Hellenic Petroleum, electricity utility PPC, lender ATEbank as well as ports, airports, motorway concessions, state land and mining rights. It plans further sales to raise 7bn euros in 2013, 13bn euros in 2014 and 15bn euros in 2015.

Violence in Athens marred the start of an unprecedented 48-hour general strike in Greece, as the country’s MPs began a two-day debate on a fresh round of austerity measures yesterday. A total of 158 MPs have registered to speak in the debate ahead of tomorrow evening’s vote on a €28 billion austerity plan and €50 billion privatisation programme, the first of two knife-edge votes for Greek prime minister George Papandreou this week.

The second vote, on Thursday, concerns a law to implement the measures, which have sparked fury among the Greek public. Greeks will see their tax bill increase significantly under the new tax regime. A couple with two children and earning €20,000 a year, for example, will pay €840 more in taxes and levies – €640 of which represents income tax hikes and €200 the first payment in a three-year special levy that will be docked from salaries.

Property taxes are also set to increase, with the owners of houses worth more than €300,000 to pay a new €200 tax. Road duty is also to go up by 10 per cent. As the parliament argued over the new austerity programme, thousands of Greeks took to the streets of the capital in protest at the measures, following a call from the country’s private and public trade union federations.

"Everyone has to demonstrate because in Greece nobody has a future," said 37-year-old protester Elena Priovolou. "I think revolution is the only solution, not just in Greece but in the European Union," continued the unemployed film editor, who says she receives no state benefits.

The demonstrations remained generally peaceful until about 2pm, when scores of koukouloforoi, a Greek term for hooded rioters, began showering riot police with stones and bottles on Athens’s central Syntagma Square. Police lines responded with tear gas and, in cases, stones. Rioters, clad in gas masks and helmets, set dumpsters alight and rounded on a mobile telecommunications van which went up in flames. A number of journalists, cameramen and photographers were also confronted by the rioters, who also attacked peaceful demonstrators.

After night fell, thousands of peaceful demonstrators returned to Syntagma Square to chant insults at parliament, as they have done every night for more than a month. A large group listened to a concert in the centre of the square while, in the side streets, gangs of rioters continued to hurl rocks at police, who responded sporadically with tear gas. Mr Papandreou’s European counterparts have warned that the payment of the next €12 billion tranche under Greece’s existing bailout mechanism, as well as the setting up of a new bailout package worth €120 billion, is conditional on both pieces of legislation being passed.

"They must be approved if the next tranche of financial assistance is to be released," said EU economics and monetary affairs commissioner Olli Rehn as the Greek debate got under way. "To those who speculate about other options, let me say this clearly: there is no Plan B to avoid default," he continued.

Although in recent days four MPs from Mr Papandreou’s ruling Socialist Pasok Party opposed the new austerity and privatisation measures, intense pressure has been brought on them to fall into line by Greece’s new finance minister Evangelos Venizelos. Yesterday, one of the wavering Pasok MPs indicated that he might vote for the package. Another, who objects to the partial privatisation of the country’s electricity company, hinted he may also return to the Pasok fold if the government makes some minor concessions.

Despite appeals from his European conservative counterparts and from Mr Papandreou, Antonis Samaras, the leader of the Conservative New Democracy party, is maintaining his opposition to the austerity legislation. However, due to the unbundling of the implementation law, to be passed on Thursday, into separate components, Mr Samaras’ party may vote for aspects that it agrees with, such as the privatisation of state-run industries.

Global markets have dodged a bullet. Greece has voted "yes" to more austerity, paving the way for the disbursement of €12 billion ($17 billion) in bailout loans and avoiding a messy default. The vote in the end was relatively comfortable, with 155 Greek lawmakers in favor, including some who previously had vowed to vote against, and 138 against. But investors can't breathe easy yet. Greece still is a source of risk, and the global picture is gloomy.

For Greece, the focus will move to implementation, with another vote due on Thursday. Meanwhile, the French plan to roll over Greek debt falls far short of being a Brady-style solution for Greece and has yet to receive the ratings firms' blessings. Further negotiations with the euro zone and International Monetary Fund aren't likely to be easy. That might mean a continued twin shortfall on both Greek overhauls and funding.

At the same time, there is a body of evidence that the global economy is slowing. Chinese manufacturing is close to stagnating, the HSBC Purchasing Managers Index shows; even the purring motor of the German economy has shifted down a gear. Southern Europe is crawling along. In many developed countries, fiscal policy is being tightened to repair strained balance sheets. In many emerging economies, interest rates are rising to contain inflation. The Federal Reserve's second bond-purchase program, known as quantitative easing, is winding down, potentially removing support for risky assets as net Treasury bond supply picks up. The market now expects Fed policy to remain on hold well into 2012. The Bank of England has dropped hints of more quantitative easing.

Yet compared with the end of the first quarter, when the outlook for the global economy was brighter, many asset prices have remained resilient. The S&P 500-stock index is down just 1.9%, the Stoxx Europe 600 has fallen 3.5%. Corporate bond spreads in the U.S. and Europe are only modestly wider. The most obvious signs of tension from the Greek crisis may ease. The Swiss franc may fall against the euro; safe-haven German, U.S. and U.K. bond yields should rise; and yield spreads for Spanish and Italian bonds should compress. But until investors are sure that the slowdown in growth is just a soft patch rather than something more sinister, risk assets more broadly may struggle to make much headway.

Germany's major banks have agreed to take part in a new aid program for Greece by accepting longer maturities on some €2 billion ($2.9 billion) in bonds that currently fall due in 2014, Finance Minister Wolfgang Schäuble said Thursday. The agreement, which follows a French plan reached last weekend, comes in time for euro-zone finance ministers discuss the aid program at a meeting in Brussels on Sunday.

Speaking to reporters alongside Deutsche Bank AG Chief Executive Josef Ackermann, Mr. Schäuble said German banks hold some €10 billion in Greek government bonds but about 55% of them aren't due to mature until after 2020. The smaller portion due by 2014, around €2 billion, would be the focus of this agreement, he said.

Mr. Schäuble said the agreement, based on a similar proposal put forward in France, would help euro-zone finance ministers determine the broad outlines of a new aid package for Greece. The so-called Eurogroup of euro-zone finance ministers meets Sunday in Brussels. Mr. Ackermann said he recognizes that banks and euro-zone governments need to cooperate on a "quantifiable, sustainable solution." "We are certain that Greece needs to be helped with further aid," he said.

Greece has €64 billion of bonds maturing by 2014. It will need more aid on top of the €110 billion program it received from its euro-zone partners and the International Monetary Fund to meet future commitments. Belgian Finance Minister Didier Reynders Thursday said that progress on talks between European governments and private-sector creditors is pushing forward a plan to solve Greece's most urgent debt problems. "We try in different capital cities to discuss with banks, insurance companies and pension funds to manage it on a voluntary basis," Mr. Reynders said in Paris. "We've seen some progress in the private sector."

Mr. Reynders also said that although it is possible that the Eurogroup meeting of euro-zone finance ministers on Sunday won't iron out all the plan's details, it may produced a go-ahead for the next tranche of Greek aid worth between €11 billion and €12 billion to be paid by mid-July.

European Central Bank President Jean-Claude Trichet Thursday said it is in "Greece's interest" and in the interest of all of its neighbors to find a solution to the country's debt crisis. "I hope we can conduct this debate in a more serious way than hitherto," he said. He stressed that he is against any involvement of the private sector in a "debt action" for Greece that isn't purely voluntary. He said that adjustment for Greece "is the first priority," adding that privatization is important for the embattled Hellenic Republic.

ECB Governing Council Member Ewald Nowotny called the French proposal on private-sector involvement "a very, very interesting step for some countries." However he said it is important that there is a common European solution, adding that discussions were taking place.

We’re all mesmerized — though apparently not the least bit bothered — today by the images of rioting in Greece as politicians there struggle to hammer out austerity plans that will get the country its next bit of methadone, er, bailout money.

But developments elsewhere in Europe threaten to steal the spotlight back from Greece ultimately and add to the degree of unhappiness. March Chandler at Brown Brothers Harriman reports, you decide:

First, note that Portugal’s Q1 budget deficit came in at 8.7% of GDP. This year’s target is 5.9% (2010=9.2%). New austerity measures will likely be forthcoming shortly. Recall that the old government collapsed when the opposition balked at the extreme austerity. The EU/IMF softened the terms under the aid package, but the new government now has to dust off those proposals that it previously blocked. This is a subtle example of the political instability that the IMF/EU plan seems to generate.

Second, political problems are coming to the fore in Spain. The minority Socialist government (seven seats shy) will need the opposition support for next year’s budget. The Catalan Party yesterday indicated it will not support the government’s budget. Neither will the main opposition party. The budget will not come up for a parliamentary vote until September. Even through Spanish law allows for a reversion to the previous year’s budget, tradition requires an election. The risk is that Prime Minister Zapatero does not complete his term that expires March 2012.

Moody’s has expressed concern about the regional fiscal slippage. The region’s account for 1/3 of the government spending and half of the public sector workers. Total debt regional debt was 11.4% of GDP in Q1 11 up from 10.8% in Q4 10. Austerity measures are not being shared equitably between the central government and the regions. The central bank warned a couple weeks ago that regional finances are worsening. Despite the passage of some labor reforms, the IMF has has urged Spain to accelerate its efforts to overhaul the economy.

Third, Italy is likely to announce additional austerity measures as early as tomorrow. S&P warned in May and Moody’s in June about the outlook for Italy’s credit worthiness. Prime Minister Berlusconi has had a number of setback already this year at the hands of the public, but his most pressing challenge is within his government. Coalition partner Northern League may not support the 2012 budget and appear to have increased pressure on Finance Minister Tremonti to resign.

Despite all of these warnings of future rioting in the streets and anxious vote-watching, peripheral bond spreads are narrower, and the euro is higher, today on Greek relief. That relief may not be long-lasting.

European leaders believe they can avoid a debt crisis in Ireland and Portugal, but are concerned that Greece could trigger problems in larger economies such as Spain, Finance Minister Michael Noonan said [Sunday]. His comments came as billionaire investor George Soros said the departure of Greece from the euro was "inevitable."

"The European authorities are more worried about countries like Spain than they are about Ireland and Portugal," Mr Noonan said on RTE radio. "The authorities I have spoken to believe they can prevent contagion spreading to Ireland and Portugal but they have some concerns about the bigger European countries, and they are going to draw the line there. "I presume they will bring other policy instruments forward as necessary."

Earlier, Mr Soros said it's "probably inevitable" that a mechanism will have to be put in place to allow weaker eurozone economies to exit the single currency. "We are on the verge of an economic collapse which starts, let's say, in Greece, but it could easily spread," Mr Soros said at a discussion in Vienna on whether liberal democracy is at risk in Europe.

"I think most of us actually agree that (Europe's crisis) is actually centred around the euro.'' He added: "The authorities are actually engaged in buying time. And yet time is working against them." European leaders have vowed to stave off a Greek default provided Prime Minister George Papandreou pushes through his €78bn reforms package.

Bank of Ireland has been forced to cancel a bond exchange plan that would have seen investors receive just 20pc of their money back. In a statement yesterday, Bank of Ireland said it had withdrawn an exchange offer for £75m of bonds issued by its Bristol & West subsidiary because of "procedural difficulties" some holders were having.

Investors included many pensioners who were dismayed by the writedown they were being asked to take, and the offer had been due to face a legal challenge in the High Court today.Albert Kempster, a 73-year-old farmer, branded the terms being offered "unfair" and had mounted a legal challenge against the bank's attempt to force a "haircut" on investors.The court hearing has been postponed in the wake of the cancellation of the offer, however.Bank of Ireland is 36pc- owned by the Irish state and is currently attempting to raise new money through a rights issue as well forcing through "haircuts" on its debt that are expected to free up €2.6bn (£2.3bn) in capital.

Just 12pc of the Bristol & West bondholders had accepted the exchange offer at the end of last week, compared with an overall acceptance level for its debt reduction plan of 74pc.About 2,400 retail investors, including many pensioners, are affected by the offer.

Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk. The result, which the European Central Bank and others hope will persuade investors the European Union was finally coming clean about the extent of banks' problems, will pressure reluctant states to prop up lenders that cannot raise money.

Euro zone sources said the European Banking Authority was set to announce within weeks that 10-15 of 91 banks being scrutinized had failed, with casualties expected in Germany, Greece, Portugal and Spain. The checks will provide the first picture of the health of EU banks since a previous round a year ago was deemed too lax. In that round, Irish banks were all given a clean bill of health months before their difficulties drove the country to seek an international bailout.

The new checks will measure how well the core capital that banks rely on to absorb losses such as unpaid loans holds up when exposed to an economic dip or fall in property prices. They also gauge the impact on banks should government bonds they own, issued by states such as Greece, lose value. But the tests stop short of assessing the full impact of a country defaulting, including the likely resultant freeze in interbank lending.

In the drive for credibility, the EBA, which runs the tests and the ECB, which sets the economic scenarios, have pushed for more banks to fail than last year's seven. "How many do we expect to fail? I would say 10 to 15," said one senior euro zone central banking source.

The EBA wants the number of banks that do not pass the tests to be around that level to show the examinations were serious, said a second source, adding the authority did not want to push for more, for fear it could spark panic. "In order to demonstrate that it is credible, the EBA would need to show that the number of bank failures is significant, without being substantial," said the source. "A number in the teens is about right." A spokeswoman for the EBA said testing was still under way and declined to comment on speculation about the outcome.

Technical and PoliticalThe tests are technical, as well as political. While the EBA and ECB want to show up the failures, national regulators want to stop their banks appearing on the list, concerned they would look incompetent for not having spotted problems themselves.

EU authorities want to expose laggard groups around the EU, said the second source, avoiding too many problems in weak countries, such as Spain, as that could prompt international lenders to shun the country and its banks. "They are going to find a way of preventing one center ... from sticking out," said the source. "If it were to be Spain, it would be very bad news. Failing German banks in a stress tests would be much safer."

The EBA, due to announce the results in mid-July to coincide with a meeting of EU finance ministers, also faces pressure from governments wanting to avoid flops that may force them to come up with financial support. One EU official said disagreement with Germany over how to apply the stress-test criteria had delayed the conclusion of the bank checks by some weeks, until July.

German regulators, who privately deny they upset the timetable by refusing to apply the criteria agreed, blame imprecise EBA templates and say the stress tests could be delayed again beyond the middle of July. "Every national regulator will be fighting for none of their banks to be on the list," said the source. "It is a mark of incompetence. It is a reputational issue and it is an issue of money."

High-level officials from European finance ministries are now working on how to help those given a failing grade. Andrea Enria, head of the EBA, last week called on governments to put plans in place to help banks that failed or were shown to be vulnerable.

On Tuesday, a spokeswoman for the EBA said governments must not be slow to plug any capital holes exposed in the checks. "It is important that concrete and decisive actions by the banks and authorities are taken following the results, including ensuring that credible capital plans ... are taken to address deficiencies."

Although the EBA is insisting on the publication of each bank's sovereign debt holdings by maturity as well as size, it is ultimately the number of banks which fail that will establish the credibility of the checks. "If it was the same as last time when seven failed, next to nothing, then no one would believe it," said one source. "But you cannot fail 50, or the banking system would collapse."

The kick-off of spring buying helped support the US housing market in April, but home prices dropped 4 per cent from the same period a year earlier as falling sales and a weak labour market weighed on the sector. Meanwhile, US consumer confidence fell to a seven-month low as Americans worried about high unemployment.

Prices of single-family houses in the 20 largest US cities sank 4 per cent from April 2010, the steepest drop since November 2009, according to the S&P/Case-Shiller home price index. The yearly fall was in line with expectations, following a 3.8 per cent decline in March. Prices in the spring and early summer of 2010 had been boosted by the government’s first-time homebuyers’ tax credit.

On a seasonally adjusted basis, prices were 0.1 per cent lower than in March, better than a forecast 0.2 per cent monthly dip, but it was the 10th straight month of price declines as the housing market continues to struggle amid a lacklustre recovery.

"The seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather," said David Blitzer, chairman of the S&P’s index committee. "For a real recovery we would need to see several months of increasing home prices, large enough to shift the annual momentum to the positive side."

New home sales have fallen 13.6 per cent from January to May, and last month the supply of new houses on the market fell to a record low. Meanwhile, the inventory of existing homes, many of which are prices at steep discounts, has continued to rise as banks work through a growing backlog of homes in foreclosure. The oversupply of distressed properties has been a drag on home values, discouraging many homeowners from selling and prompting American households to rein in consumption.

"It’s hard to sell when buyers have the leverage and foreclosures continue to create a gap between distressed sale prices and non-distressed sale prices," said Jonathan Basile, director of economics at Credit Suisse. "Homeowners’ unwillingness to sell remains high given the widespread declines in prices – 92 per cent of homeowners said it was a bad time to sell their home in May, according to the Thomson Reuters/University of Michigan Surveys of Consumers."

Tuesday’s figures showed that prices fell over the year in 19 of the 20 cities, led by Minneapolis’s 11.1 per cent annual plunge. Washington was the only city where prices rose, climbing 4 per cent. On a monthly basis, unadjusted prices rose in 13 cities, led by Washington, but prices fell to new lows in Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa.

Separately, the Conference Board’s index of consumer confidence fell again in June, dropping to 58.5 from May’s upwardly revised 61.7. Economists had predicted the reading would tick up to 61.0 from last month’s originally reported 60.8.

Rising pessimism was driven by a gloomier assessment of current conditions and a more negative short-term outlook, said Lynn Franco, director of the Conference Board. "Given the combination of uneasiness about the economic outlook and future earnings, consumers are likely to continue weighing their spending decisions quite carefully," she said.

Consumers’ evaluation of present conditions decreased to 37.6 from 39.3 in May, while expectations for the next six months fell to 72.4 from 76.7. More people said jobs were "hard to get," while fewer respondents said they expect more jobs in the months ahead. Consumers were also less optimistic that their incomes would grow in the second half of the year.

The drop in confidence in the labour market was likely a reflection of May’s grim non-farm payrolls report, Credit Suisse’s Jill Brown noted. Private-sector jobs grew by just 83,000 in May and the unemployment rate climbed to 9.1 per cent.

Britain is facing a 'tsunami' of house repossessions as soon as interest rates start to rise, one of the country's leading bankers has warned. Richard Banks, the chief executive of UK Asset Resolution (UKAR), the body that runs the £80bn of mortgages bailed out by the taxpayer during the banking crisis, also said in an interview with the Guardian that the Labour government's pleas at the start of the crisis for lenders to keep families in their homes was forcing some homeowners further into debt.

In a warning that the industry may have been too lenient with some of its customers, he said he believed a policy of "tough love" would be fairer to people facing long-term difficulty in keeping up payments on loans taken out when house prices were at their peak and personal incomes on the rise. His warning came the day after the international bank regulator said the Bank of England, which has kept rates at 0.5% for more than two years, would have to raise rates shortly to curb inflation.

The Bank of International Settlements said the policy of the Bank of England, whose rate-setting committee is split over whether or not to increase borrowing costs, was "unsustainable". With 750,000 customers, UK Asset Resolution, set up to run the nationalised mortgages of Bradford & Bingley and parts of Northern Rock, is the country's fifth largest mortgage lender. But 23,000 of those mortgage holders are more than six months behind with payments and Banks admitted the projections for the number of people falling behind on payments could get "scary" if lenders did nothing to prepare for higher rates.

"You can see if you don't do something about it, you can see a tsunami," he said. "If you don't get into the hills you could get drowned by this. If you don't manage this properly it could get very messy."

He regards it is an industry-wide problem, albeit one that might be concentrated at UKAR as its customers include buy-to-let landlords and so-called self-certified borrowers – those without salaried income. UKAR, through three calls centres in Crossflatts, West Yorkshire, Gosforth, Newcastle, and Doxford, Sunderland, has begun cold-calling customers it believes are at risk of falling behind on payments in an attempt to keep their mortgage payments on schedule. The bank is also trying to tackle customers behind with payments for six months or more and at risk of repossession.

His concern about a surge in repossessions is partly the result of moves by the industry early in the 2008 crisis to grant so-called forbearance to help customers stay in homes by, for example, reducing monthly interest payments. "We as an industry, as a kneejerk reaction in the emergence of the crisis, and because the government asked us to be forbearing to customers in the hope it would all go away, we have been too lenient with some customers.

"It's a tough love approach," he said. "It's treating customers fairly, not nicely, because if you can't afford your mortgage you are only increasing your indebtedness. If we allow you to increase your indebtedness, that's not really fair to you."

This month the Council of Mortgage Lenders forecast a rise in repossessions from 40,000 this year to 45,000 next. This figure would still remain well below the 75,500 peak of 1991. The remarks by Banks follow a warning last week from the new regulator set up to spot financial risks in the system – the Financial Policy Committee (FPC) inside the Bank of England – that warned banks may be providing a "misleading picture of their financial health" if they were not making big enough provisions for borrowers in difficulty.

Forbearance has been brought into play in up to 12% of mortgages, the FPC said. It also noted that the most "vulnerable" households were concentrated in a few banks. It did not scrutinise UKAR but noted that the two other bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland, had the largest exposure to customers whose mortgages were bigger than their value of their homes.

Last month, the Financial Services Authority issued a guide to handling forbearance in which it warned: "Arrears and forbearance support provided with due care by firms has a beneficial impact for both the firm and the customer … However, where such support is provided without due care or any knowledge or understanding of the impacts, it has potentially adverse implications for the customer, for the firm's understanding of the risks inherent within its lending book, and in turn for the regulators and the market."

The proposed payment by Bank of America would settle claims by large investors including Pimco and BlackRock Inc.

In the latest blow from its takeover of Countrywide Financial Corp., Bank of America Corp. tentatively agreed to pay $8.5 billion to settle claims by large investors stung by losses on mortgage-related securities that Countrywide issued.

The final details of the agreement were still being worked out, according to a bank executive knowledgeable about the pending settlement but not authorized to discuss it publicly.

The 22 investors, including money-management giants Pacific Investment Management Co. of Newport Beach and BlackRock Inc. of New York, held $56 billion in bonds backed by loans from Countrywide, once the nation's largest home lender and an aggressive supplier of subprime and other high-risk mortgages.

"This transaction essentially takes all Countrywide's private-label mortgage-backed securities off the table," the executive said Tuesday. "It's considered to be a significant step forward in Bank of America putting the Countrywide issues behind us."

The pending settlement covers only mortgage-related securities issued by Countrywide and not those that BofA issued on its own.

BofA shares, which had lost 3 cents on the day, were up 12 cents at $10.94 in after-hours trading after word of the impending deal leaked. Some estimates of the bank's liability had been much higher than $8.5 billion.

"The Street will view this as a good number," said Paul Miller, an analyst with FBR Capital Markets.

Nearly all major mortgage issuers of that era bundled up most of their loans and sold them to private investors as well as to government-sponsored entities such as Fannie Mae and Freddie Mac.

Fannie, Freddie and a host of institutional investors have demanded that the banks buy back many of the mortgage bonds, contending that the lenders understated the riskiness of the loans and mishandled troubled borrowers after the industry's meltdown beginning in 2007.

Bank of America agreed in January to pay Fannie and Freddie $2.8 billion to settle demands for buybacks of flawed home loans, in addition to some $3.5 billion in such payments it had already made to them.

The pending settlement would be the first with private mortgage bond investors, but it's unlikely to be the last. Among other big lenders with major exposure are Wells Fargo & Co. and JPMorgan Chase & Co. Chase had bought the remains of one of the most aggressive lenders, Washington Mutual Bank, after the Seattle-based thrift became the largest bank failure in history.

BofA, based in Charlotte, N.C., has struggled to put Countrywide's woes behind it since 2008 when it paid $2.5 billion in stock for the Calabasas-based mortgage specialist.

The bank settled securities-fraud accusations by some major Countrywide shareholders in August, but before the deal was finalized 33 plaintiffs — including the California Public Employees' Retirement System — dropped out to seek more money on their own.

And in April, BofA agreed to pay $1.1 billion to mortgage insurer Assured Guaranty Ltd. Other mortgage insurers are pressing claims to try to recover losses they sustained on Countrywide loans.

BofA is also among five major loan servicers negotiating with a coalition of state attorneys general and federal officials seeking damages and reforms following revelations that the lenders shortcut procedures and failed to follow laws while foreclosing on borrowers.

The damages under discussion in that case range from a total of $5 billion to more than $20 billion, according to people close to the negotiations.

A $100bn hit for investors. That is the price being put on the unthinkable: a downgrade of US debt should Republicans and Democrats fail to strike a deal on America’s debt ceiling. Judging by the very low levels of Treasury bond yields, which move inversely to bond price, investors for now appear sanguine about the risk that the US could lose its coveted triple A rating.

Indeed, the world’s biggest and most liquid government bond market, at $10,000bn and growing, has a number of built-in attractions, in particular its reserve currency status, that suggest it could shrug aside the loss of its top rating. With investors fretting over Greece and other debt-laden eurozone members, the US bond market is once more a haven in times of trouble. Signs of weakening global and US growth are also helping boost the appeal of owning Treasury debt.

But, given that the US Treasury market has more than doubled from $4,500bn since 2007, and faces a "daunting" budget outlook according to the Congressional Budget Office, there is growing concern that Treasury debt is on the path to losing its triple A rating. This year, the ratio of US debt to the size of the US economy will approach 100 per cent. And just last week the CBO projected that, without significant policy changes that address an aging population and rising per capita healthcare costs, federal debt will reach nearly 200 per cent of gross domestic product by 2035.

Projections of large long term deficits moved rating agency Standard & Poor’s in April to revise its outlook on the US credit rating from ‘stable’ to ‘negative’. Now research from Standard & Poor’s Valuation and Risk Strategies, a research arm of S&P’s parent McGraw Hill, estimates that should US debt be downgraded, losses for investors owning Treasury paper could total $100bn.

Michael Thompson, managing director at S&P Valuation and Risk Strategies, says his team arrived at these findings by tracking average credit default swap rates for sovereign credits around the world to determine a range of interest rate fluctuations that could be expected if the US triple A rating was lowered. They then combined this rate movement data with bond duration data and total debt outstanding to determine the potential price drop.

Mr Thompson says if the US were downgraded to double A, CDS rates would increase 23.2 basis points and if it were downgraded to single A, CDS rates would increase 37.5 basis points. In turn, given that the 10-year note has a modified duration of approximately 8.5 years, its price would drop by 2 per cent and 3.2 per cent for ratings reductions to ‘AA’ and ‘A’, respectively.

Such calculations may be little more than an academic exercise, given the reserve currency status enjoyed by the US. Richard Gilhooly, strategist at TD Securities, says: "Regardless of what Moody’s and S&P say, the market still needs a benchmark and that’s the US. If the US becomes double A plus, that's the new triple A."

Japan is a case in point where ratings downgrades of government debt, for example, have not prevented yields staying very low, even if, unlike the US, most of that country’s outstanding debt is held domestically. By contrast, nearly half of US Treasuries is held by foreign investors as the US market sits at the centre of the global financial system and is viewed as a safe haven and extensively used as collateral by investors across markets.

Fidelio Tata, head of US interest rate strategy at Société Générale says: "Treasuries are so big and liquid as a market and investors have no other choice for a benchmark." He adds: "It’s more of an academic argument as to how a downgrade would affect the market."

A sovereign risk index developed by BlackRock ranks sovereign debt issuers according to the relative likelihood of default, devaluation or above-trend inflation. Based on their metrics, the US is currently ranked in the lower half of countries perceived as being stronger, behind China and Germany, but ahead of the UK, France and Japan.

While this suggests the odds of a downgrade are low, not all bond investors are so sanguine. Bill Gross, founder and co-chief investment officer of Pimco, has been very vocal about the long term US fiscal position and has turned negative on US government debt.

The spectre of a downgrade could come a lot sooner than some think as Washington continues to wrangle over increasing the $14,300bn Federal debt ceiling ahead of an early August deadline.

Given that some $4,000bn of Treasury debt is used as collateral across the financial system, any delay in raising the debt ceiling could upset the vital infrastructure that supports daily trading across bonds. "Even a short suspension of payments on principal or interest on the Treasury’s debt obligations could cause severe disruptions in financial markets and the payments system," Ben Bernanke, Federal Reserve chairman, said earlier this month.

There could be a significant impact on bond prices. JPMorgan polled 45 large clients recently for their views of how much the yield on 10-year notes would rise in the event of a missed coupon payment by the Treasury. The mean response was 37 basis points, but foreign investors expected a significantly larger initial increase than domestic investors at 55bp.

The bank estimates a 20 per cent reduction in Treasury holdings by foreign investors over a one year period would result in Treasury yields rising by 50bp to 60bp. These higher interest costs would increase annual deficits by $10bn in the short run, and by $75bn per year over time, only serving to make the US’s task of cutting its budget deficit even tougher.

Consumer confidence dropped to a seven-month low in June as Americans grew concerned about the outlook for jobs and wages. The Conference Board’s sentiment index decreased to 58.5 from a revised 61.7 in May that was higher than previously estimated, figures from the New York-based private research group showed today. Home prices fell in the year ended in April by the most in 17 months, another report showed.

Unemployment hovering around 9 percent, deterioration in the housing market and a drop in share prices may restrain Americans’ sentiment, raising the risk that the biggest part of the economy will stagnate. The Federal Reserve last week kept in place record monetary stimulus to help nurture the expansion through what it views is a "temporary" slowdown.

"We have a fairly weak economy with little to no job growth," said Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "With consumers so worried about their job prospects, I’m not so sure that we can count on demand picking up. The housing market is dead in the water."

Home values in 20 cities declined 4 percent in the 12 months to April, according to the S&P/Case-Shiller index. From March to April, values fell 0.1 percent on a seasonally adjusted basis, the smallest decline since July 2010. "Home prices are still easing, but the declines are not dramatic anymore," said Harm Bandholz, chief U.S. economist at Unicredit Group in New York, who correctly predicted the year- over-year drop. While month-to-month changes show "prices have basically bottomed and are moving sideways," he said "we’re a long way away from significant increases in house prices."

Stocks RiseStocks climbed on optimism that a deal can be reached to help Greece avoid defaulting on its debt. The Standard & Poor’s 500 Index gained 1.3 percent to 1,296.67 at the 4 p.m. close in New York. Treasuries slumped, pushing up the yield on the benchmark 10-year note to 3.03 percent from 2.93 percent late yesterday.

Economists predicted a June reading of 61, according to the median estimate in a Bloomberg News survey. Projections ranged from 55 to 66.7 in the survey of 69 economists. The index averaged 98 during the last economic expansion that ended in December 2007. The group’s measure of present conditions deceased to 37.6 from 39.3 in May. The measure of expectations for the next six months dropped to 72.4, the lowest since October, from 76.7.

Sentiment FiguresToday’s report parallels other data on consumer sentiment. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 71.8 in June from 74.3 in May. The Bloomberg Consumer Comfort Index declined to minus 44.9 for the week ended June 19 from minus 44.0 the prior week. The percent of respondents in the Conference Board survey expecting more jobs to become available in the next six months slumped to 14.2 from 16.7 the previous month. The proportion expecting their incomes to decline rose to the highest since August.

Confidence declined in eight of nine U.S. regions, today’s report showed. Consumer spending, which accounts for about 70 percent of the economy, fell 0.1 percent in April and May after adjusting for changes in prices, a report yesterday from the Commerce Department showed. It was the first back-to-back decline since March and April 2009, when the economy was still in a recession.

Buying PlansFewer respondents in the Conference Board’s survey indicated they were planning to buy cars, homes or major appliances in the next six months. Weak employment gains may be keeping consumers out of stores. Employers added 54,000 jobs in May, the slowest pace in eight months, according to June 3 Labor Department figures.

Fed officials cut their projections for economic growth this year and raised their estimates for the jobless rate after their June 21-22 meeting, noting that "the damping effect of higher food and energy prices on consumer purchasing power and spending" contributed to the slowdown. Gasoline prices retreated to $3.55 on June 27 from an almost three-year high of $3.99 high on May 4, according to figures from AAA, the largest auto club. The decline may free up some income for consumers to spend on other goods and services.

The Conference Board’s report showed 38 percent of respondents, the most March 2009, expected stocks to decline in the next year. Rick Dreiling, chairman and chief executive officer of Goodlettsville, Tennessee-based Dollar General Corp., said he expects continued unemployment to weigh on consumer confidence. The largest U.S. dollar-store chain posted a first-quarter profit on June 1 that fell short of analysts’ estimates.

"We are remaining cautious as unemployment, and just as importantly, underemployment, gas prices, food inflation and the general uncertainties of the economic outlook continue to challenge customers," Dreiling said on a June 1 call with analysts.

Ilargi: Tanks in the street of Athens, and people throwing themselves out of windows. It's come to this kind of threatening language, and in the next 48 hours or so it will only intensify, and financial markets will fluctuate because of it as if that's their very and only purpose in life.

The words about the tanks and suicides come from one of Greece's newly fangled fat twin political duo, Theodoros Pangalos, the deputy prime minister who appeared out of nowhere the past few days, as far as that is physically possible for someone his size.

Look, I'm not trying to make fun of fat people here, it’s just the irony that the fact that the "face" of Greece in the international financial media has overnight changed to these two huge guys that no-one outside of the country had ever heard about before. And that they're the ones threatening the Greeks with hell and brimstone if they don't agree to austerity measures that will make a substantial part of the population go hungry. "We all have to tighten our belts now", that sort of thing. Well, those are quite some belts to tighten.

There's Pangalos, and then there's Evangelos Venizelos, poised to be the next PM if and when Papandreou manages to slip out of the building, preferably unseen. Here’s pics of the glimmer twins:

Luckily for the Greek population, there are signs of support for them outside of their parliament buildings, and outside of their borders:

The Guardian in England runs this, from Costas Douzinas and Petros Papaconstantinou:

1. The bailout of Greece is not a gift or grant but a loan bearing high interest. Crucially, bailout funds are not used to pay civil servants' salaries and pensions, but to pay off debt held by German and French banks. According to IMF estimates, Greece will pay €131bn in refinancing and interest payments between 2009 and 2014, far more than the initial bailout loan of €110bn.

In a magician-like sleight of hand, German and French workers are forced to bail out their national banks, not directly as in the 2008-9 banking bailouts but through the mediation of Greece, which inevitably becomes the target of populist outbursts. The Greek government, on the other hand, was ordered to provoke an economic and social meltdown unimaginable in western Europe in peacetime in order to receive the loans.

2. This unprecedented punishment led to an increase in debt and to permanent economic depression. The European governments now propose to offer a second loan, if Greece accepts an even more odious set of measures and sells off the family silver. Acceptance of these measures has been made a precondition for the payment of the fifth instalment of the initial bailout.

This is blackmail worthy of a backstreet loan shark. The privatisation plan includes the sale of 17% of the public power corporation, the engineroom of growth, which will remove the state's controlling interest. Under the new plan, foreign emissaries will be assigned to the main ministries and the company set up to privatise public wealth. The market value of this stake is just €400m, because of the stock exchange decline.

But the corporation owns 15 power plants and the budget for a new plant about to be built is €1.3bn. This post-Soviet style privatisation will pass valuable public assets to private hands.

3. The loss of economic sovereignty is accompanied by unprecedented attacks on the political and legal integrity of the country. IMF and EU inspectors visit the country on a regular basis, examine the records and dictate policy. Under the new plan, foreign emissaries will be assigned to the main ministries and will run the companies that will privatise the public wealth. Government capitulation is not enough.

The European authorities demand that all political parties should accept the new austerity measures before the next loan instalment is paid. Surreptitiously, a new type of colonialism is emerging, in which the Brussels elites treat the European south as undeserving poor or colonial subjects to be reformed and civilised.

[..] ... they're entrapped by foreign banker diktats demanding tribute. They call it a "rescue." In May 2010, the Papandreou government agreed to earlier austerity in return for loans. Now they're at it again, demanding more or they'll collapse the entire economy, or so they say. And the same scheme is replicated in Ireland and Portugal. Moreover, it's heading for Spain, and potentially most of Europe and America as representative governments head closer to "financial oligarchy."

More bailout help is now needed in return for greater austerity, as well as selling off Greece's crown jewels as explained above. On June 24, New York Times writer Stephen Castle headlined, "Europeans Agree to a New Bailout for Greece with Conditions," saying:The deal "came a day after Greece agreed with international creditors to more austerity measures (requiring parliamentary approval) as part of revised plans for 2011-15 aimed at" assuring bankers are first in line to get paid, popular and national interests be damned. An agreement in principle expects half the funds offered to come from new loans, a fourth from state asset sales, and the remainder from private sector contributions.

lowering the tax-free income threshold to 8,000 euros annually from 12,000;

setting the lowest tax rate at 10%, with exemptions for people up to age 30, over-65 pensioners, and disabled people; and

annually taxing the self-employed an additional 300 euros.

In response, public anger is visceral through daily protests. The ruling PASOK party's approval rating is 27%. Over 90% of the public are dissatisfied with Greece's governance. Another 90% say the country is "on the wrong path." About 80% are unhappy with their lives, and 70% are concerned that conditions will keep deteriorating.

Nonetheless, on June 22, Papandreou won a parliamentary vote of confidence ahead of two more steps the IMF and Eurozone leaders require before releasing more funds - agreeing on their demanded austerity plan and enacting measures to implement it.

In fact, acting IMF managing director John Lipsky (a former JP Morgan Investment Bank vice chairman) said no opposition will be tolerated. In other words, Eurozone nations have no option but to obey IMF diktats, Lipsky acting more like a commissar than banker.

Ilargi: See, I’m looking at those two fat blobs above, and the severity of the measures imposed on Greece, and not only do I want to express my support once more for the people who will be in Syntagma Square over the coming days, I also ask myself: what would happen stateside if anything close to this would be imposed in the US?

I'm thinking we would all win if the Greeks do, that they're fighting our fight for us, but that what they‘re fighting against is us, or at least our governments (which we elected). And maybe we should change that.

But yes, do ask yourself: what do you think would happen in New York, LA, Atlanta, Chicago, if those Greek austerity measures mentioned above would fall on the doorsteps of your community? Same question for those of you living in London, Berlin, Amsterdam, Montréal.

Maybe this is a good time to speak up. At least now you still can. Once there are tanks in the streets, that may prove to be not so easy anymore. Look, Greece is not the worst of the lot, or the biggest issue. As Jon Stewart pointed out last week, Greek debt amounts to some $44,000 per capita. In America, it's $45,000.

We're all in this together, believe it or not. US banks have exposure to Greece through credit default swaps to an extent that nobody can define. We do know, though, that it's substantial. And that if the Greek austerity vote fails on Wednesday, those US banks will come looking for more bailouts. From a government that can't even agree on a debt ceiling, because the debt is so monstruously high already there is no way out anymore.

And if Athens manages to push through that vote, nothing will have changed, even is you'll see markets rise: Greece can't pay its debt owed to international financial institutions, not now, and not tomorrow. And you know what? Neither can the US.

It’s time to make a choice. And accept the consequences of that choice. If you can't pay them back, then don't.

The usurious conditions of the Greek bailout reveals Brussels' colonial mindset – but Athens is showing citizens can resist

After months of attacks on the supposedly feckless Greeks, the western media, intellectuals such Amartya Sen and Jürgen Habermas and the United Nations have finally woken up to the fact that the catastrophic austerity imposed on Greece is unsustainable. It was about time. This is an unprecedented and morally odious type of collective punishment imposed on a majority of Greeks, who did not see a penny from the profligacy of their rulers and who live close to the poverty line.

The partial acknowledgment of the injustice and unworkability of the austerity measures came only after popular resistance and the peaceful revolt of the indignant scored its first major victory for the anti-austerity and pro-democracy campaign. Syntagma has placed a clear sell-by date on George Papandreou and the elites that ruled Greece for 37 years. The vote of confidence for the reshuffled government bought a limited amount of time, deferring its inevitable collapse.

Offering to resign on Wednesday morning and, when his offer was turned down, offering the de facto leadership of the party and government to Evangelos Venizelos, his bitter party enemy, in the evening, Papandreou is a "dead man walking". While most commentators believe the virtually bankrupt country must default and negotiate a substantial reduction of debt, the government keeps insisting that it will repay every last penny.

Syntagma has become Tahrir Square in slow motion. It is a peaceful, democratic revolt that was easier to start because the fear of brutal repression is smaller, but will be harder to complete as it faces the enormous might of the European Union and global finance capital. Now that the indignant have changed the rules of the political game, it is perhaps time to revisit some basic facts that have been seriously misrepresented.

1. The bailout of Greece is not a gift or grant but a loan bearing high interest. Crucially, bailout funds are not used to pay civil servants' salaries and pensions, but to pay off debt held by German and French banks. According to IMF estimates, Greece will pay €131bn in refinancing and interest payments between 2009 and 2014, far more than the initial bailout loan of €110bn.

In a magician-like sleight of hand, German and French workers are forced to bail out their national banks, not directly as in the 2008-9 banking bailouts but through the mediation of Greece, which inevitably becomes the target of populist outbursts. The Greek government, on the other hand, was ordered to provoke an economic and social meltdown unimaginable in western Europe in peacetime in order to receive the loans.

2. This unprecedented punishment led to an increase in debt and to permanent economic depression. The European governments now propose to offer a second loan, if Greece accepts an even more odious set of measures and sells off the family silver. Acceptance of these measures has been made a precondition for the payment of the fifth instalment of the initial bailout.

This is blackmail worthy of a backstreet loan shark. The privatisation plan includes the sale of 17% of the public power corporation, the engineroom of growth, which will remove the state's controlling interest. Under the new plan, foreign emissaries will be assigned to the main ministries and the company set up to privatise public wealth. The market value of this stake is just €400m, because of the stock exchange decline. But the corporation owns 15 power plants and the budget for a new plant about to be built is €1.3bn. This post-Soviet style privatisation will pass valuable public assets to private hands.

3. The loss of economic sovereignty is accompanied by unprecedented attacks on the political and legal integrity of the country. IMF and EU inspectors visit the country on a regular basis, examine the records and dictate policy. Under the new plan, foreign emissaries will be assigned to the main ministries and will run the companies that will privatise the public wealth. Government capitulation is not enough. The European authorities demand that all political parties should accept the new austerity measures before the next loan instalment is paid. Surreptitiously, a new type of colonialism is emerging, in which the Brussels elites treat the European south as undeserving poor or colonial subjects to be reformed and civilised.

Although a small peripheral country, Greece had from the beginning special symbolic value for the European project. The word "Europe" is Greek, while the classical polis or city-state gave birth to democracy, science and philosophy and gave politics its name. Symbolic significance was an important consideration in the decision to admit Greece to the EU in 1981 despite the chasm between its economy and those of the northern core. But those were the days when the vision of a union of social solidarity and prosperity was still alive. Today's vision promotes a neocolonial disciplining of populations.

The Greek people and democracy have become sacrificial victims similar to Euripides's heroine in Iphigenia in Aulis. Iphigenia must be sacrificed by her father Agamemnon to appease the angry gods and set wind to the sails of the Greek fleet on the way to Troy. In the contemporary setting, the greedy gods are the bond markets with credit-rating agencies as their obscure priests. Saving the banks at the expense of the people is the object of the sacrifice and unfettered capitalism profits the contemporary Troy. Iphigenia eventually survived, miraculously rescued by a mysterious cloud, which replaced her with a deer.

In the modern Greek tragedy, salvation can only come from the magic "cloud" of the protesting demos that has occupied Syntagma and many other squares for a month. Standing below parliament, the Syntagma multitude has become the lower house or the parliament of the common people, confronting the paralysed upper house and adding popular participation to the failing principle of representation.

Athenian laws were prefaced with the statement Edoxe te boule kai to demo, "It is the considered opinion of parliament and the people". On Tuesday and Wednesday, the two will be opposed as the demos, assisted by a two-day general strike, will try to persuade parliament not to enact into law the new tranche of measures. Whatever the outcome, direct democracy has returned to its birthplace and is changing the meaning of politics. The last few days proved that a multitude of free and determined citizens can successfully resist mighty powers. This is the promise and hope Athens offers to Dublin, Lisbon and London.

Economist Michael Hudson calls it "Replacing Economic Democracy with Financial Oligarchy" in a June 5 article by that title, saying:

After being debt entrapped, or perhaps acquiescing to entrapment, the Papandreou government needs bailout help to pay bankers that entrapped them. Doing so, however, requires "initiat(ing) a class war by raising its taxes (harming working households most), lowering its standard of living - and even private-sector pensions - and sell off public land, tourist sites, islands, ports, water and sewer facilities" - in fact, all the country's crown jewels, lock, stock and barrel, strip-mining it of everything of worth at fire sale prices.

Why? Because the US-dominated IMF, EU and European Central Bank (ECB), the so-called "Troika," demand it as the price for bailout help that wouldn't be needed if Greece wasn't trapped in the euro straightjacket. Membership means foregoing the right to devalue its currency to make exports more competitive, maintain sovereignty over its money to monetize its debt freely, and be able to legislate fiscal policies to stimulate growth.

Instead they're entrapped by foreign banker diktats demanding tribute. They call it a "rescue." In May 2010, the Papandreou government agreed to earlier austerity in return for loans. Now they're at it again, demanding more or they'll collapse the entire economy, or so they say. And the same scheme is replicated in Ireland and Portugal. Moreover, it's heading for Spain, and potentially most of Europe and America as representative governments head closer to "financial oligarchy."

pressure, bribe or otherwise cajole or force governments to acquiesce; and

burden working households with higher unemployment, wage and benefit cuts, higher taxes, and other austerity measures to assure financial predators profit - always at their expense, forcing once prosperous nations to surrender sovereignty to financial oligarchs, ruling world economies like fiefdoms.

Hudson said European central planning concentrated financial power in "non-democratic hands" from inception under European Central Bank (ECB) dominance. Operating like a financial czar over its 17 Eurozone members, it:

"has no elected government (to) levy taxes;

(t)he EU constitution prevents (it) from bailing out governments," unlike the Fed able to monetize US debt in limitless amounts; and

"the IMF Articles of Agreement also block it from giving domestic fiscal support for budget deficits," saying:

"A member state may obtain IMF credits only on the condition that it has 'a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.' "

However, despite ample foreign exchange reserves, IMF loans are offered "because of budgetary problems," precisely what it's not allowed to do. As a result, "when it comes to bailing out bankers," said Hudson, "rules are ignored" to save them and their counterparties from incurring losses. And it works the same way in America under the Fed, dispensing open-checkbook amounts to Wall Street on demand.

Greece's business-friendly fiscal legacy, in fact, caused today's crisis, squeezing public spending in favor of the rich the rich, especially with sweetheart tax policies letting much of their income go undeclared.

Financial deception followed. On February 8, 2010, Der Spiegel writer Beat Balzli headlined, "How Goldman Sachs Helped Greece to Mask its True Debt," saying:In 2002, Goldman helped them borrow billions by circumventing Eurozone rules in return for mortgaging assets. Using creative accounting, debt was then hidden through off-balance sheet shenanigans, employing derivatives called "cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period - to be exchanged back into the original currencies at a later date."

Debt entrapment followed, nations like Greece held hostage to repay it, the usual price being structural adjustment harshness, making a bad situation worse. In 2010, in return for a $150 billion loan, Papandreou imposed:

large public worker layoffs (around 10% overall);

public sector 10% wage cuts, including a 30% reduction in salary entitlements;

More bailout help is now needed in return for greater austerity, as well as selling off Greece's crown jewels as explained above. On June 24, New York Times writer Stephen Castle headlined, "Europeans Agree to a New Bailout for Greece with Conditions," saying:The deal "came a day after Greece agreed with international creditors to more austerity measures (requiring parliamentary approval) as part of revised plans for 2011-15 aimed at" assuring bankers are first in line to get paid, popular and national interests be damned. An agreement in principle expects half the funds offered to come from new loans, a fourth from state asset sales, and the remainder from private sector contributions.

lowering the tax-free income threshold to 8,000 euros annually from 12,000;

setting the lowest tax rate at 10%, with exemptions for people up to age 30, over-65 pensioners, and disabled people; and

annually taxing the self-employed an additional 300 euros.

Up to $120 billion in cuts are expected though final figures haven't been announced, depending on amounts raised from asset sales and private contributions.

In response, public anger is visceral through daily protests. The ruling PASOK party's approval rating is 27%. Over 90% of the public are dissatisfied with Greece's governance. Another 90% say the country is "on the wrong path." About 80% are unhappy with their lives, and 70% are concerned that conditions will keep deteriorating.

Nonetheless, on June 22, Papandreou won a parliamentary vote of confidence ahead of two more steps the IMF and Eurozone leaders require before releasing more funds - agreeing on their demanded austerity plan and enacting measures to implement it.

In fact, acting IMF managing director John Lipsky (a former JP Morgan Investment Bank vice chairman) said no opposition will be tolerated. In other words, Eurozone nations have no option but to obey IMF diktats, Lipsky acting more like a commissar than banker.

At the same time, austerity, privatizations, and greater debt amounts are self-defeating. Workers, of course, are hardest hit unless mobilized mass action stops it. Ideally they can do it by general strike, shutting down the country, setting non-negotiable demands, staying out until predatory banker diktats are rejected, and prevailing by letting nations regain their sovereignty and people their rights.

That's how labor battles are won. It works the same everywhere when rank and file determination stays the course to victory.

Somewhere in the bowels of the mighty European Central Bank, there is a number that many investors would give a lot of euros to see. It refers to the volume of Greek government bonds that are now sitting in the ECB’s coffers, after being lodged there by European banks through central bank repo operations.

Sadly, the ECB considers this number far too "sensitive" to release, even after a delay. Nevertheless, as fears about sovereign risk rise, those hidden data are assuming ever-greater importance. On Thursday, yields on Greek bonds rose sharply higher, after Moody’s warned that it – like Standard & Poor’s – might soon downgrade Greek debt. The yield on Greek two-year notes, for example, rose 74 basis points on Thursday to 6.4 per cent.

But while that price swing was striking, what was equally notable was that it occurred in secondary markets that have been surprisingly thin in recent days. For notwithstanding all the recent attention on sovereign debt, traders say the liquidity of secondary Greek bond markets – together with other countries such as Portugal – has recently been very thin. And that, in turn, has exacerbated the price volatility, such as the swing that occurred on Thursday after the Moody’s news.

So why is there such low turnover? One obvious reason is that trading in small country eurozone bonds has never been particularly high, even in good times, due to the level of fragmentation across the eurozone debt as a whole. Another key problem is that many investors are currently haunted by a deep sense of uncertainty about how to read the signals emanating from the eurozone.

A couple of years ago, it was impossible for most observers to imagine that the eurozone ever really would let a country such as Greece default. But the financial and banking crisis has shown investors – often for the first time in their lives – that unimaginably horrible things do occasionally occur. Hence, many investors are now sitting frozen, completely lacking in confidence about their ability to predict what might happen next.

I suspect another reason for that illiquidity is the ECB itself. At present it is estimated that Greek banks hold up to €37bn ($50bn) of the outstanding €270bn-odd stock of Greek government bonds and bills. German banks, such as the Landesbank, are thought to hold a slightly lower amount, while French banks also have a significant chunk of Greek bonds.

It is a fair guess that many, if not most, of those bonds are now with the ECB. After all, what the ECB’s repo operations essentially do is let banks turn a risky asset (ie Greek bond) into something safer (euros). And that, in turn, means that banks now have fewer Greek bonds to lend to hedge funds, or other traders. This has several fascinating implications. For one thing, it casts interesting light on the current debate about sovereign credit default swaps. In recent days, German and French leaders have warned of potential curbs on sovereign CDSs, arguing that these markets have sent out distorted – and alarmist – signals.

But while those complaints about distortions in the sovereign CDS world may be correct, the illiquidity of the government bond markets hardly makes those markets such a shining paradigm of price signals. If nothing else, that implies that investors and politicians should keep a close eye on both cash and derivatives markets; both are now distorted.

But another big question raised by the ECB’s holdings of Greek bonds is who might – or might not – be tempted to buy these bonds going forward. In recent years, European banks have been happy to hold Greek bonds since they felt able to use them for repo deals with the ECB. But if the credit rating agencies keep downgrading Greek debt, these bonds may no longer be eligible for that ECB window from the end of this year. That, coupled with the fact that many European banks are now cutting their credit limits to Greece, could damp banks’ appetite.

Some brokers hope – or pray – that asset managers will step in to plug the gap. After all, Greece is mulling over a new €10bn issue next week. And current yields on Greek debt look pretty tempting, at least for investors, which do not need to mark to market, and which do not think that Greece is about to default. (And personally, I think that remains unlikely, not least because so many German banks and life assurance companies hold Greek bonds that there is a strong incentive for a German rescue.)

But with Greece’s future looking uncertain – and secondary market liquidity low – it remains far from clear how many long-term private sector investors will buy Greek bonds. While some fly-by-night hedge funds might bid, these are hardly popular in Europe now. Barring some truly deft sales action next week, in other words, a public bail-out looms. All eyes are on Athens; and, for that matter, on the faceless bureaucrats in Frankfurt too.

A senior Goldman Sachs banker has conceded that complex currency swaps used to reduce Greece’s budget deficit "could have and should have" been more transparent, as the investment bank moved to head off mounting criticism of the deals. Goldman is under fire from European regulators and politicians for structuring a series of transactions that helped Greece to trim its national debt figures in 2001, just after Greece was admitted to Europe’s monetary union.

Gerald Corrigan, a former president of the Federal Reserve Bank of New York who joined Goldman in 1994, told a UK parliamentary committee that, "with the benefit of hindsight ... the standards of transparency could have been and probably should have been higher". Mr Corrigan is the first Goldman banker to speak publicly about the swaps as questions over the bank’s role in Greece’s current financial woes continue to swirl.

Goldman posted a short explanation of the transactions on its website, stating that the swaps complied with European Union accounting principles in effect at the time and had had a "minimal" impact on Greece’s overall fiscal situation.

"In December 2000 and in June 2001, Greece entered into new cross-currency swaps and restructured its cross-currency swap portfolio with Goldman Sachs at a historical implied foreign exchange rate," the statement says. "These transactions reduced Greece’s foreign-denominated debt in euro terms by €2.367bn and, in turn, decreased Greece’s debt as a percentage of [gross domestic product] by just 1.6 per cent, from 105.3 per cent to 103.7 per cent."

In his testimony, Mr Corrigan emphasised that countries had sought to control their budget deficits for "centuries", and that Goldman was only one of several banks that had helped governments to "manage" their debt burdens over the past decade.

European Commission authorities have requested information from Greece about the transactions. It emerged on Monday that Athens had missed a Friday deadline to have supplied the information to Eurostat, the Commission’s statistics agency. Athens attributed the delay in part to disruptions caused by a four-day strike at the finance ministry.

Four deputies indicate that they might not support austerity package in Parliament this week

As many as four PASOK deputies are considering not voting for the government’s medium-term fiscal plan in Parliament this week, leaving the ruling PASOK party with the slimmest of majorities to pass the new set of austerity measures through the House.

Greece has been told by its European Union partners and the International Monetary Fund that it has to pass the latest round of spending cuts and tax hikes in order to qualify for a July loan instalment of 12 billion euros and to move a step closer toward agreeing a second bailout with its lenders.

Without the July tranche, Greece will go bankrupt. However, the government and its new Finance Minister Evangelos Venizelos have yet to convince all 155 Socialist MPs that they should back the midterm fiscal plan when Parliament concludes its debate and vote on Wednesday.

Kozani MP Alekos Athanasiadis insists he will oppose the measures. "Nothing has changed for me," he told Skai TV on Saturday. "I want to make it clear that I will not vote for the midterm fiscal plan. I do not disagree with the government on a lot of points but I stick to my view that some public enterprises should not be sold."

On Friday, Thomas Robopoulos, a Thessaloniki lawmaker, also said that he was considering opposing the measures. Robopoulos said he would probably quit Parliament after casting his vote against the PASOK government. Robopoulos’s Thessaloniki colleague Chryssa Arapoglou has also indicated she is reluctant to approve the package and is considering quitting her post.

On Saturday, PASOK deputy Panayiotis Kouroublis also told Skai TV that he was in emotional turmoil over whether to support the government. "For anyone who is an MP, these are the most torturous days of his life," he said. Kouroublis said he sent a note to Venizelos seeking clarification on 15 points and would wait for a response before making a final decision on how he would vote.

If all four MPs oppose the government, PASOK would be left with a one-seat majority unless it received support from another smaller party, such as the centrist Democratic Alliance. Venizelos acknowledged on Saturday that some of the measures are "severe and unfair" but added that "this is the only way at the moment that we can address an urgent national need."

The Greek parliament is today scheduled to start the most important parliamentary debate in the country’s recent history. If a majority approves the agreed austerity package in a vote due on Tuesday, all is well. For now. The European Union and the International Monetary Fund will continue to provide credits. If not, Greece might default within days. How should Greek MPs vote?

Until last week, I would have said: definitely Yes. The country is running a large primary deficit. The austerity imposed by the EU and the IMF is mild compared with the austerity that would be required if the country were to be cut off from any source of external finance. A messy default would destabilise the global financial system and could force Greece to abandon the euro.

Such an argument is vulnerable to relatively subtle shifts in circumstances. One such shift may have occurred last week, when EU and IMF negotiators imposed a new tranche of austerity. The measures included a cut in the tax-free allowance, and a tax levy of €100-€300 for the self-employed. The decision triggered angry protests in Athens. I see it as a political provocation and an act of economic vandalism. It could derail the entire crisis resolution process.

There is no doubt that Greece needed a large fiscal adjustment. And, yes, the Greek government backtracked a little on the previously agreed programme to win support for last week’s vote of confidence. The latest slice of austerity was intended to plug this gap. But it would be a mistake to deprive Greece of all means of political manoeuvre.

Politically, the new austerity programme is backfiring already. It strengthens the position of Antonis Samaras, the Greek opposition leader, who opposes it. Fellow centre-right EU leaders last week put pressure on him. He resisted. His argument is that austerity is killing the economy and that Greece now needs a jolt to get it back to a growth path.

By unwittingly strengthening Mr Samaras’s resolve and his public support, the EU destroys any chances of the national unity it so desperately seeks. This is, after all, going to be a programme lasting several years. If the present government were to fall, Mr Samaras would stand a good chance of winning. He is already ahead in the polls. If elected, he would ask the EU to renegotiate. The EU and the IMF might decline. The whole strategy could unravel at that point.

Mr Samaras’s argument against austerity is hard to refute on economic grounds. Austerity was clearly necessary at the start of the programme, but this is the time for the emphasis to shift towards growth, which Greece needs under any scenario – default or no default, exit or no exit. The EU wasted weeks on the silly debate of private sector participation, instead of focusing on the issues that really matter.

The problem is that the entire process remains sensitive to sudden electoral mood swings in the creditor countries. The first priority of German, Dutch and Finnish politicians has been to reduce the costs of the programme as much as possible. They even went so far as to earmark uncertain Greek privatisation receipts as an integral part of the next finance package, rather than for debt reduction.

Under the scheme now likely to be agreed, any shortfall in privatisation receipts would therefore open a finance gap. The creditor countries would then almost certainly ask Greece to plug the gap through even more austerity. Such a strategy is financially reckless and politically irresponsible.

No wonder the Greeks are becoming wary of extreme austerity. They will only ever accept it over long periods if there is a plausible endgame. EU economics officials and their political masters are ideological supply-siders. They misjudged the effects of the Greek austerity programme on growth the first time round. They do so now. They will do it again. And this ruins the endgame for the Greeks.

The combination of a half-hearted financial support programme and dogmatism are reasons why even perfectly rational Greek MPs might end up voting No tomorrow. The programme, as it stands, is politically, economically and morally hard to justify. The only reason to vote Yes would be to delay the default until the Greek public sector achieves primary balance, which will not happen before 2012. The EU’s strategy reduces the choice of the Greeks to defaulting either next month, or next year.

The Greek government has a narrow majority and is putting heavy pressure on its MPs to vote in favour of the programme. The government may yet prevail. If it does, this will be because of arm-twisting more than to the strength of the argument, which is no longer clear-cut.

Greek MPs should be asking both sides for more clarification. The problem with Mr Samaras’s position is that a vote against austerity would trigger more austerity in the very short run. Mr Samaras needs to explain how Greece can fund itself when no outside finance is available. What is his strategy? And the Yes camp needs to explain why austerity can work now when it failed before.

Greek MPs are now facing the choice between a lie and a disaster. Considering what is at stake, the EU and the IMF should never have put Greece in that position.

EU officials and bankers to discuss ways of resolving Greece's financial crisis including proposal for debt write off

European Union officials and bankers from across the region are meeting in Italy to discuss ways of resolving the Greek debt crisis, as the Athens parliament prepares to debate its austerity package before a critical vote later this week. The talks will take place in Rome on Monday evening and will examine whether private creditors could agree to roll over some Greek debt. Top of the agenda will be a proposal from the French banking industry, under which borrowers would effectively write off a third of their debts.

The meeting is organised by the Institute of International Finance and comes at the start of a crunch week for Greece, and the wider eurozone. If the Athens parliament opposes the austerity bill, then Greece would probably be denied the €12bn (£10.6bn) slice of financial aid due next month, which could force it to default and trigger calamity across the financial markets. Defeat may also scupper the second bailout package, which was agreed in principle last week.

The vote on the package of spending cuts, tax rises and asset sales is due on Wednesday. It is likely to be close, given prime minister George Papandreou's shrivelling majority in parliament. A second vote, on an enabling bill to speed up the pace of reform, is expected on Thursday. The measures remain deeply unpopular in Greece, with demonstrators storming the Acropolis on Monday morning. They hung a banner declaring: "The peoples have the power and never surrender. Organize – Counter attack."

Events in Greece continue to dominate the financial markets, where traders are dogged by fears that the debt crisis could flare up across the region again. The spread between the interest rates on ultra-safe German bonds and their Italian equivalent reached a record high on Monday morning, and the spread with Greek bonds also widened. Stock markets were edgy, while the euro fell against the dollar and hit a new low against the Swiss franc.

"There are ongoing worries that failure to resolve the situation in Greece has the potential to see fallout on a global scale," said Cameron Peacock, market analyst at IG Markets. "It'll be no surprise if we find that the appetite for risk simply isn't there among traders."

The French bank planFrance's banking sector is one of the biggest creditors to Greece, holding about €9bn of debts according to recent data. This makes it particularly vulnerable to the crisis that has been developing over recent weeks.

Under the French banks' proposal, private creditors whose Greek debts mature would agree to invest half the sum back with Greece, by buying new, long-dated bonds with maturities up to 30 years. An additional 20% of the maturing debt would be reinvested in high-quality bonds through a special fund, structured to guarantee repayment. The plan could appeal to European leaders who are taking a hard line against private creditors, as their maturing debts would not immediately be paid off in full. It could also find favour with banks who are unwilling to simply swap all their bonds for new securities.

However, the credit rating agencies could still choose to view the plan as a technical default, triggering a "credit event". France's finance minister Christine Lagarde confirmed this morning that a "first draft" of the plan had been drawn up.

Gary Jenkins, head of fixed income research at Evolution Securities, compared the French proposal to the Brady Plan: used during the Latin America debt crisis of the 1980s. It saw banks agree to swap their loans for bonds that would reduce the debt burdens of countries including Argentina, Brazil, and Mexico. "If widely accepted, this should satisfy Germany's previous call for substantial private sector involvement," said Jenkins.

European leaders have admitted they are preparing for a Greek default as the eurozone debt crisis enters a pivotal week.

Greek politicians will vote on a radical €28.4bn (£25.2bn) austerity package in the coming days that they must pass if the country is to receive the vital fifth tranche of a €110bn bail-out agreed last year. The outcome is expected to go down to the wire as the ruling party's slim majority is pushed to the limit by the opposition's refusal to support the deal, a wave of national strikes, and another round of public protests.

Werner Faymann, the Austrian Chancellor, said on Sunday he "can't rule out" a Greek default and Wolfgang Schaeuble, the German finance minister, revealed that Europe is preparing "for the worst". "We are doing everything we can to prevent a perilous escalation for Europe but must at the same time be prepared for the worst," Mr Schaeuble said. "If things turn out differently than everyone expects that would of course be a major breakdown. But even in 2008, the world was able to take coordinated action agai-nst a global and unpredictable financial market crisis."

If the austerity package is passed, Greece has been promised a second bail-out of up to €120bn. Private sector creditors are being urged to participate on a voluntary basis but evidence is mounting that their involvement will be less than the €30bn officials at the European Union and International Monetary Fund hope.

German banks were reported over the weekend to be pushing for state guarantees in return for voluntarily "rolling over" the debt, but the demands were rejected by Chancellor Angela Merkel as they would increase the German taxpayers' exposure. In Britain, the Treasury said there were "no specific proposals" for the UK private sector to be involved. President Nicolas Sarkozy indicated that French banks were prepared in principle to take part in the programme, but no details have been agreed.

In a show of support for Europe, though, Chinese premier Wen Jiabao yesterday promised that China would continue to buy European sovereign debt. Noting that it had just agreed to buy Hungarian bonds, he said: "That is China lending a helping hand to Hungary at a time when that country is in difficulty. We will do the same thing for other European countries. "[Since the sovereign debt crisis,] China has actually increased the purchase of government bonds of some European countries and we have not cut back on our euro holdings."

Greece's deputy prime minister, Theodoros Pangalos, sought to shore up support, describing talk of Greece quitting the euro as "immense stupidity". However, he warned that although he is optimistic about winning the first round of the austerity vote, he is more wary about securing approval for specific laws to enact fiscal reforms and privatise public companies. "That's where we may have problems. I don't know whether some of our members of parliament will vote against it. It's possible," he said.

George Soros, the hedge fund manager famous for shorting Sterling in the 1990s, added that it is "probably inevitable" that a country will quit the euro. "There are fundamental flaws that need to be corrected," he said. What Europe's leaders are saying about the bail-out.

The boardwalks and bars flanking the crystal waters of Athens' marinas were once the leisurely venues of choice for Greece's well-heeled elite. But not any longer.

The Greek government, under huge international pressure to wring every possible cent out of its woefully leaky tax system, has rounded on the country's wealthy residents and demanded they pay their dues, making the rich nervy and in some cases even driving fearful mariners away from the harbour.

In recent months teams of tax collectors have been making spot checks on luxury yachts and upmarket beach clubs in a desperate attempt to boost state revenues and stave off default. They target the marinas as a way of investigating the tax returns of their self-employed residents. High-earning Greeks have been buying expensive yachts which they claim are for a tourist charter business, for which there are large tax incentives. They then declare much of their professional income as if from that business, enabling them to pocket it free of tax.

For the Greek government at the moment, every cent counts. The socialist prime minister George Papandreou has been forced to negotiate a new bail-out worth some €110 billion (£98 billion), as Europe enters a crucial period in the euro crisis.

A knife-edge vote in the Greek parliament on a new package of cuts is expected on Wednesday, with Mr Papandreou desperately needing to convince his reluctant backbench MPs to approve the measures. If Greece refuses to accept more austerity measures, the consequences for Greece, the EU and indeed the global economy could be dire. Yet politicians are struggling to convince their angry constituents that more cuts - and the closing of such tax loopholes - are the only solution.

"It's the biggest money laundering scheme around," said Kostas Tsiplantonis, a businessman with four sailing boats, about the yachting swindle. A third of the vessels moored in the Marina Alimos, one of Greece's largest marinas in the south of Athens, are the property of middle class doctors, lawyers and engineers who are now being targeted for possible tax evasion. "People claim they earn only €20,000 taxable income and that the boats they own are charter enterprises and therefore under the current rules tax free. But it's clearly not the case," he said.

Such practice has been tolerated but now the net is closing in, and daily newspapers carry notices of a new hotline for people to inform on tax dodgers. "Unfortunately tax evasion is so extensive and has been tolerated by society for so long that it is a hell of a job to tackle. But it has to be done with urgency," said Costas Bakouris of the Greek arm of the anti-corruption organisation Transparency International, which estimates that a third of the Greek economy is based on undeclared revenues.

"As well as short term measures to find the rascals who haven't been paying what they should and prosecute them, we need a long term plan to instill the behaviour of a civilised society where everyone takes responsibility – and that could take a generation." Those yacht owners who could, swiftly sailed off into the sunset before the tax man could find them. But many who remained found their vessels confiscated, and a sorry fleet of impounded boats bobs on the quayside – a symbol of how low this great seafaring nation has sunk.

Mr Papandreou's majority in parliament is down to a handful of votes, with one deputy from his ruling PASOK party announcing on Friday he would vote against the measures, joining another party rebel who announced his opposition earlier this month. A poll published last week showed that 73 per cent of the electorate were against the new austerity plan. And if they fail to approve the proposals, then Greece will default on its loans, fail to receive the additional money, and risks spiralling into an economic abyss, unable to pay hundreds of thousands of state employees.

The events have shaken the eurozone to the core, with senior European officials now openly describing it as a calamity on par with the economic woes of the 1930s. Washington has warned it could even drag down the world economic recovery. "We're at a critical point in the most serious crisis since the second world war," warned Olli Rehn, the European commissioner for monetary affairs.

At the heart of the Greek drama is the feeling that the people have profited for far too long from feeble taxation, cushy jobs in the state system, and an excessively-generous work culture which allows many employees to retire at 55. Even before the new bail-out, Greece owes the equivalent of a year-and-a-half of total national economic output: some €350 billion. But the austerity plan, which largely centres on a €50 billion privatisation scheme, is deeply unpopular both within parliament and on the streets.

Notis Mitarachi, shadow finance minister from opposition New Democracy party told The Sunday Telegraph that the austerity package had serious flaws. "If the last programme had met its objectives we wouldn't be here again now but it was unsuccessful and now they are asking to approve another. "The fear is that we will be back here in a year from now asking Europe for a third bail-out package, because this round of measures won't be successful either."

The new finance minister Evangelos Venizelos has been given the unenviable job of convincing the world that Athens is capable of reforming the Greek economy, and persuading those at home that it is in their interest. Described by one parliamentarian as a man who can "sell ice to Eskimos and sand to the Bedouin" he must persuadie Greek society of the need to implement structural reform and crackdown on tax evasion, which is estimated to cost the state up to €50 billion a year.

In his first week in office Mr Venizelos said: "We will spare no effort to collect what is due to the state. We promise to draft and apply a new and honest tax system, one that has been needed for decades, so that taxes are duly paid by those who should pay." Tens of thousands of demonstrators are expected to gather in the capital's Syntagma Square on Sunday to protest against the plan and Greece's two major unions have called a 48 hour general strike on Tuesday and Wednesday.

A rolling strike by workers at the state's electricity company over plans to sell off a 17 per cent stake is causing blackouts across the nation. In Syntagma Square where protesters have been camped out for weeks, many feel Greece should default on its debt and return to the drachma. Rosalia Panagiotopulou, an unemployed graduate, said: "I think we are at the point where it's clear Greece has nothing to gain from being within Europe. We are being persecuted by the richer countries and would do better on our own."

But the idea of Greece leaving the euro would cause huge trauma far beyond the country's borders. Across the entire eurozone governments are uneasily watching proceedings, with officials in fragile Italy, Spain and Ireland especially wary. Irish finance minister Michael Noonan even joked last week that he would make a series of T-shirts proclaiming "Ireland is not Greece" – which he would then sell.

Yet there is a determination in most of Europe that failures in one country cannot cause the whole eurozone to implode. France and Germany are leading calls to support Mr Papandreou – mainly because their financial institutions are so entangled in the web of euro debt. The French foreign minister, Alain Juppe, said: "There is a very strong determination among the member states to save what we have done since 50 years all together."

Without irony even tiny Estonia – the newest member of the eurozone, having joined in January – has pledged its support for the cradle of Western democracy. "It's a question of solidarity," said Andrus Ansip, the prime minister. But he couldn't resist offering a pearl of wisdom – one which will deepen the gloom among the yacht owners in Athens. "If I may give my advice to Greece, it is that you have to cut public expenditure. You have to make structural reforms. And you have to create a really efficient taxation system."

In a SPIEGEL interview, leading German economist Stefan Homburg argues that euro-zone members should not bail out Greece, discusses who is making a profit from the crisis and explains why he himself is buying Greek bonds. "I believe in the boundless stupidity of the German government," he says.

SPIEGEL: The European Union and the International Monetary Fund are planning a new bailout package for Greece involving the voluntary participation of banks. What's your take on this?

Homburg: Banks cannot participate voluntarily. An executive board is committed to its company's welfare, and not the public interest. If it waives outstanding debts at the expense of its own company, this is a breach of trust and punishable by law.

SPIEGEL: Banks can only do business if the financial markets function properly. If the banks help make this happen, it certainly can't be a punishable offense.

Homburg: A bank can waive a portion of a debt with the aim of saving the remainder. This occurs in all bankruptcy proceedings. But things are different here, precisely because of the bailout package: If the bank refuses to make its own contribution, taxpayers alone will pick up the tab. This is exactly what a board of directors has to strive to achieve to avoid being accused of criminal breach of trust.

SPIEGEL: So the voluntary participation of private creditors, which German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed on, will achieve little or nothing?

Homburg: It was all just a big show which was mainly intended to calm the German public. Merkel wanted mandatory participation, Sarkozy wanted none at all. In effect, Sarkozy has prevailed.

SPIEGEL: Do you prefer Merkel's original proposal?

Homburg: That proposal also fell short of the mark. In a market economy, even in the case of a plumber whose customers don't pay their bills, it's never a question of getting creditors "involved" (in helping to deal with a bankruptcy). Instead, when push comes to shove, it is creditors, and creditors alone, who have to write off their loans. Only then do they have an incentive to carefully choose who they lend money to. A market economy with no personal liability cannot function. The government bailout initiatives create misdirected incentives that continuously exacerbate the problems on the financial markets.

SPIEGEL: But the plumber is not, as they say, too big to fail -- his or her bankruptcy wouldn't cause entire banks to collapse. The European Central Bank has warned of a massive new financial crisis if it comes to the compulsory involvement of private creditors or even a restructuring of Greece's debt.

Homburg: The alleged risk of contagion is a myth that doesn't stand up to closer scrutiny. If you share my conviction that all this talk of Greece being too big to fail is simply nonsense, then there is no reason for bailouts

SPIEGEL: yes, but only if you're right.

Homburg: No, it also holds true in the reverse situation. If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn't solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we're finished. Then the problem continuously escalates and leads to a much greater crisis.

SPIEGEL: Europe wants to use the bailouts to buy time. The idea is that during this period the banks can recover and countries like Portugal, Ireland and Spain can get back on an even keel, so the risk of contagion is not so great when the inevitable restructuring takes place in the distant future. That is the strategy.

Homburg: I wouldn't call it a strategy. First, states bailed out their banks, now states themselves are being bailed out. But there is no next level to fall back on beyond this bailout. The bailout packages have merely exacerbated the crisis. Last year, if we had adhered to the Lisbon Treaty, which prohibits assistance payments, Greece would have restructured its debt, just as Uruguay, Argentina, Russia and other countries have done over the past 15 years ...

SPIEGEL: but none of these countries were members of a monetary union.

Homburg: There is no economic argument that supports the idea that national defaults are worse when they occur in a monetary union. Of greater importance is the size of the country in question, and in this respect there is a clear difference between Greece and Russia.

SPIEGEL: In a monetary union, isn't there a much greater danger that the crisis will spread from one weak member country to another?

Homburg: No. The contagion spreads in precisely the opposite direction, because many banks and hedge funds benefit from the following business model. Step one: They sell the bonds of the country concerned. Step two: They spread negative rumors about the country. Step three: After bond prices have fallen, they buy them back cheaply. And, finally, they take governments for a ride with this nonsense that a default would have devastating consequences. In a zero-sum game, there are not only losers, like us taxpayers, but also winners.

SPIEGEL: And what is the risk of contagion now?

Homburg: After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem.

SPIEGEL: If there were such a business model, a lot of people would be buying Greek government bonds now.

Homburg: In recent days, I myself have invested a considerable sum in Greek bonds. They will mature in one year's time and, if all goes well, produce a 25 percent return on investment. I sleep very soundly at night because I believe in the boundless stupidity of the German government. They will pay up.

SPIEGEL: You are not troubled by moral scruples?

Homburg: Since I involuntarily help finance the rescue packages through my taxes, I have no problem with also receiving a portion of the profits. Why should it only be banks and hedge funds that benefit?

SPIEGEL: You are apparently very confident that Greece will also be bailed out if it fails to implement, or insufficiently implements, the austerity measures that are being demanded.

Homburg: Absolutely. Greece is neither economically nor politically capable of sorting out its finances. It will never be in a position to repay the money that it has borrowed up to now. The German government will pay up all the same.

SPIEGEL: And what will happen next?

Homburg: Many politicians have also come to the realization that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU.

A debt restructuring isn't an alternative option for Greece as the consequences of such an event on Europe's financial markets could dwarf the bankruptcy of Lehman Brothers, a key member of the European Central Bank's executive board said Monday.

"A restructuring—that is often discussed in the case of Greece—constitutes absolutely no alternative" to adjustment and reform, warned Jürgen Stark, a hawkish German member of the ECB's board, according to the text of a speech given in Berlin. "The effects of a restructuring on the stability of the financial market system in Europe are not foreseeable and could dwarf the impact of the Lehman insolvency. Anyone who claims otherwise, mistakes the complexity of the situation."

Mr. Stark added that the ECB continues to "keenly" warn against any solution to the Greek crisis that results in a so called "credit event," or in Greece being classified as in "selective default or worse."Furthermore, the central bank rejects any solution that "would carry out any coercion on private creditors."

Ultimately, a restructuring would fail to solve the fundamental problems that Greece faces with its budget, Mr. Stark argued. As long as the Greek public budget features a large primary deficit, a haircut—a cut in the money owed to creditors—would only offer an "interim" improvement, he said. Furthermore, the political pressure to reform in Greece would immediately disappear. "Therefore, the speedy and thorough implementation of the adjustment programs, that the countries in crisis have negotiated with the IMF and the EU is the best path out of the current crisis," he said.

Turning to monetary policy, Mr. Stark reinforced that the ECB is "very vigilant and will do all to safeguard the stability of the euro, also in the future, and anchor inflation expectations at a low level." In April, the bank began raising interest rates after leaving its main rate at a record low of 1% for nearly two years. Experts expect the ECB to raise rates again by 0.25 percentage point in July.

Greece's Deputy Prime Minister Theodoros Pangalos has blasted suggestions that it would be better for his country to abandon the euro and return to the drachma as an "immense stupidity". "Those who say this are extremely stupid. While they may be analysts, university professors or economists, saying that is an immense stupidity," Pangalos told daily Spanish newspaper El Mundo.

Debt-wracked Greece has been told by European peers that it cannot hope to continue receiving aid from a 110-billion-euro ($148.9 billion) rescue package agreed with the EU and the IMF last year without biting budget reforms and privatisations.

The Greek parliament will vote on an austerity package this week but some economists have argued that Athens needs to restructure its debt and leave the euro to become economically competitive again.

"Returning to the drachma would mean that on the following day banks would be surrounded by terrified people trying to withdraw their money, the army would have to protect them with tanks because there would not be enough police," said Pangalos.

"There would be riots everywhere, shops would be empty, some people would throw themselves out the window ... And it would also be a disaster for the entire European economy."

The austerity measures the Greek parliament will vote on later this week to keep the country's huge debt viable and persuade international creditors to extend additional assistance, are worth more than 28 billion euros for the period 2011-2015. Athens also intends to sell partial or full stakes in a host of state entities, aiming to raise 50 billion euros to reduce the overall Greek debt of more than 350 billion euros.

The Chinese premier, Wen Jiabao, has thrown the eurozone a vital lifeline and pledged to buy billions of euros of European debt to keep the single currency project alive.

The move, which will be a relief to struggling eurozone countries including Greece, Portugal and Ireland, was announced as Mr Wen continues his four-day trip to Europe, arriving in Britain last night from Hungary and going on to Germany on Monday night. China's plan to continue to invest in the continent's volatile sovereign debt market comes as efforts continue to prevent Greece's financial crisis making it the first nation to be forced out of the euro.

"China is a long-term investor in Europe's sovereign debt market," Mr Wen said at a press conference with the Hungarian prime minister, Viktor Orban. "In recent years we have increased by quite a big margin our holdings of government bonds. We will consistently continue to support Europe and the euro." He added: "China is ready to work with Europe to share opportunities, cope with challenges and achieve common development and to make unremitting efforts for stable development of the world economy and an in-depth development of China-Europe ties."

Mr Wen's comments, made before boarding a flight to Birmingham, came after a week in which EU leaders committed themselves to staving off a Greek default provided that the prime minister, George Papandreou, pushes through a package of budget cuts next week. As a signal of China's enthusiasm for doing deals with Europe, Mr Wen signed 12 trade deals with Hungary and agreed to finance more of the country's debt.

His openness in pledging his support will also bolster the UK Government's hopes of strengthening Anglo-China ties during his time in the UK, when he will tour the Chinese-owned MG car factory in Longbridge and attend a UK-China summit at 10 Downing Street tomorrow.

Writing in today's Sunday Telegraph, Jim O'Neill, chairman of Goldman Sachs Asset Management, said that the eurozone should look east for solutions to their continuing debt problems. He said that it is likely that sovereign wealth funds would be keen to invest. Mr O'Neill said: "Perhaps Europe's leaders should try to put some of their differences aside and offer Asia's yield-hungry investors an even bigger kicker to help solve the crisis.

"As Italy has showed for much of the past 30 years, if you can keep growing and keep financing costs below your nominal growth rate, then you can just about cope with a lot of debt. Unless the Club Med countries get their yields down, it is an impossible burden. Europe's leaders have got to really decide whether they want European monetary union or not, and if so, it is time to act big."

Yves Mersch, a member of the European Central Bank governing council, warned yesterday that a Greek sovereign debt default would lead to financial chaos across Europe, adding it was up to the parliament to deliver on its austerity promises. In Athens, Greek ministers urged wavering members of the ruling Socialist party to do their duty in a knife-edge vote in parliament this week and back painful austerity measures that lenders demand as the price for fresh bailout loans.

Finance minister, Evangelos Venizelos, offered to talk to any MP who might have concerns. "I believe that the sense of responsibility will ultimately prevail; the God of Greece is great," he said. A two-day general strike is planned this week to coincide with the votes, following a rolling series of strikes at companies including Greece's dominant electricity producer, PPC, which is slated for privatisation next year.

Britain's banks will be urged by the Treasury to take multimillion pound losses as part of Europe-wide plans to prevent a catastrophic meltdown of the Greek financial system. Despite the assurance of David Cameron that the UK taxpayer will not pay towards the latest EU bailout of Greece, Treasury officials are working behind the scenes to persuade British banks holding Greek bonds to take a "haircut" now as the best way to avert a potential global crisis. Britain's banks hold about £2.5bn of Greek bonds.

One idea, proposed by Germany, is that the banks would be persuaded to swap Greek bonds for loans on less favourable terms when they expire – a so-called "soft restructuring" that would help ease the pain for Athens. Politicians across the EU are battling to secure "private sector involvement" in the Greek rescue alongside government and IMF help in the hope of preventing Athens from defaulting on its debts, a move they fear could start a ripple effect in world markets.

Analysts say even a debt swap, under which Athens would pay its debts over a longer period, would leave bondholders facing a reduction in the value of their investment. But officials argue that only if private banks take a hit now can the damage be limited. The Treasury so far has been on the sidelines of EU discussions about how to ensure private sector creditors play their part, partly because of Cameron's insistence that UK taxpayers will not help to finance a second Greek bailout.

The prime minister's refusal to put money into the latest rescue led to criticism of the UK's stance behind the scenes at a summit in Brussels last week. Senior European figures said London needed to focus more urgently on the potential effect of a Greek default on the UK's banking sector and economy. "The UK has the third largest exposure after France and Germany," said a high-level EU source. "It should be aware of the effect of standing aside from discussions."

But Whitehall insiders have confirmed that chancellor George Osborne's staff are on the case, working on ways to involve British bondholders in rescue moves that will almost certainly involve a short-term hit.

Another worry is that Britain's banks and hedge funds have written multibillion-pound insurance contracts – credit default swaps – that would be triggered if Greece defaults. Erik Britton, director of City consultancy Fathom, said: "It's not the direct exposure, it's the indirect exposure and the implications of an unruly default that I would be worried about. French and German banks bought Greek bonds, and they took out insurance against default. Who did they take out that insurance with? The US and UK banks. There has to be a loser – who's the loser?"

A fresh bailout for Greece will go ahead on condition that its parliament votes for new austerity and reform programmes. It is expected to total about €110bn, with about €30bn coming from bondholders, €30bn from privatisations and the rest from eurozone members and the IMF.

Persuading the private sector to play a part is seen as crucial to the chances of averting a Greek disaster and was a key part of German chancellor Angela Merkel's pitch in Brussels. Without this, EU leaders fear Greece will default, triggering payouts on a web of complex financial insurance products and creating chaos in world markets as investors struggle to work out who owes what. Some analysts fear default could create a "Lehman moment", like the aftermath of the collapse of the giant US investment bank in 2008, when investors lost confidence in each other and the world financial system froze up.

At the inaugural press conference for the Bank of England's new financial policy committee, governor Sir Mervyn King described the deteriorating situation in the eurozone as a "mess" and warned that, although Britain's banks own a relatively small number of Greek bonds – about £3bn worth – there could be dramatic knock-on effects if a default resulted in a loss of confidence throughout the global financial system.

That gives Treasury officials a strong incentive to ensure that the banks sign up. Without a voluntary agreement from investors, the powerful credit ratings agencies will declare that Greece has defaulted, spreading chaos. US Federal Reserve governor Ben Bernanke last week urged European governments to resolve the Greek crisis or risk threatening "the European financial system, global financial system, and European political unity".>

Forget Greece. Or at least put Greece to one side: the real financial disaster waiting to happen is on the other side of the Atlantic. It is a disaster born of self delusion, in a nation that prides itself on plain speaking and openness.

There is much to be celebrated in the United States. They have Osama bin Laden's scalp. They have a vibrant and open political system. The things, material and intellectual, that people want and admire still tend to be American. But they (and we) face a huge looming crisis. It transcends politics and political candidates – it is much bigger than Michele Bachmann's hair or Barack Obama's thesaurus – and sometime soon they are going to have to face it. It's the debt.

America's federal government debt is growing at $40,000 per second. It has reached $14 trillion, whatever that means. More comprehensible perhaps is this fact: the debt will soon match the entire GDP of the United States. Outside wartime, that has never happened before.

A combination of tax cuts and spending increases, coupled with the war on terror and the financial meltdown, has seen America's fiscal health evaporate. Even the savings implied last week in the surge home of US troops from Afghanistan, count for little more than a drop - a splash, perhaps - in this ocean of debt. The real issue is the future of America's domestic spending.

The projections are appalling: the non-partisan Congressional Budget Office thinks that by 2030 interest payments plus spending on pensions and health will take up all the government's tax income. Everything else, from education to war-fighting, will have to be borrowed for. Or cut out. The thought should send shivers down all our spines.

A nation whose productive capacity, whose support of economic and political freedom plays such a big part in our world could be heading for a period of poverty and introspection. And the poverty could come quite suddenly – brought on by interest rate rises forced on America by world markets, or by foreign powers selling dollar bonds.

While making my BBC Radio Four documentary Analysis: America's Debt I asked Richard Haass, of the Council on Foreign Relations think tank, whether the fiscal crisis might allow the US to be blackmailed. His answer: "Yes, and it is ironic that question would come from someone with your accent. What it brings to mind is 1956... when the US and the Eisenhower administration disagreed profoundly with the British, French and Israeli tri-partite decision over invading Suez.

"Essentially the US took advantage of Britain's sterling problem to exercise some economic leverage over the British government, and that led to a hasty retreat. "So one can imagine a situation nowadays, where say there is a crisis over Taiwan between the US and China - which holds a significant number of dollars - and one can imagine the Chinese might be prepared to threaten the dollar, make some comments to weaken it unless the US backs off some of its support of Taiwan."

So what is to be done? Here is where it gets really tricky. The problem is not primarily economic. Nor is it entirely political. It is wider, deeper: it is a failing at the most basic level of culture.Americans, it seems to me, have allowed themselves to become fundamentally deluded about the kind of people they are.

Look at Alaska. The Pulitzer prize-winning author Anne Applebaum tells me in the documentary that Alaska is a myth. People who live there (encouraged by a famous former governor) imagine that it is the last frontier where rugged all-American individualists grapple with snow and bears and protected only by their guns, come out on top. In fact Alaska is the most heavily subsidised state in the Union. Social spending and tax breaks are huge – Alaska sucks hard on the teat of the state.

For Alaska, read America. Americans have a weird inability to see themselves for what they are: deeply involved with the federal government and deeply dependent on it. The myth obfuscates and befuddles. It allows Americans – including the Tea Party movement – to have wonderfully vivid rows about public spending and tax but never really to confront the reality that taxes (my taxes!) are going to have to rise and spending on health and pensions (my health, my pension!) is going to have to be cut.

The Republicans have had a go at it recently – encouraged by the Tea Party folks – but came a horrible cropper in a by-election for a previously safe New York State congressional seat where their voters simply melted away after hearing that their entitlements might be cut. Americans like to blame their politicians for the mess but the fault, frankly, is with the people. They will not give up their national delusion. How does it end?

Richard Haass invokes Churchill: Americans will do the right thing but only after all other options are explored. Who am I to argue with Haass and Churchill combined? But it is fair to say that they are leaving it rather late.

Analysis: America's Debt is at 8.30 pm on Monday June 27 on BBC Radio Four.

The Bank’s new financial policy committee said UK lenders have relaxed mortgage terms and forgiven overdue payments at a much higher rate than in previous economic downturns. The FPC cited evidence showing that for every home loan that has been repossessed or is in arrears, another four have been relaxed or are being renegotiated.

If not for this lenient "forbearance process", which helps keep people in their homes and tides businesses through rough patches, as much as 12 per cent of UK mortgage borrowers could be in arrears. During the last recession in the early 1990s, about 3.5 per cent of mortgages were repossessed or in arrears.

The FPC said it was most concerned that banks had not set aside adequate provisions for this potential new crop of troubled loans. "If provisioning is inadequate, banks’ reported profits and levels of capital may provide a misleading picture of their financial health," said Sir Mervyn King, Bank governor and chairman of the FPC.Andy Haldane, FPC member and the Bank’s head of financial stability, said: "There is a fog around forbearance and a fog around the provision for those loans.

"It is perfectly legitimate to cut a borrower some slack .... but in doing so, a firm needs to be cognisant of the risk and, [just] as important, set aside money."

Sir Mervyn said UK banking’s "most severe" problems may lie in commercial real estate lending, for which regulators do not have even the most basic data on forbearance. Studies suggest that 30-80 per cent of commercial mortgages may be in forbearance.

The FPC has asked the Financial Services Authority to conduct comparable forbearance studies on all categories of UK bank lending, both at home and overseas. The hidden domestic threats to the UK’s financial sector will add to the concerns of regulators already distracted by the eurozone debt crisis.

Sir Mervyn said the crisis poses the biggest threat to the banking system he oversees. He was also critical of the European Union’s repeated efforts to bail out Greece, Ireland and Portugal: "Providing liquidity can only be used to buy time. Simply the belief, ‘Oh we can just lend a bit more’, will never be an answer to a problem which is essentially about solvency."

The Bank governor argued that the EU must come up with a solution that addresses the underlying causes rather than simply stringing Greece along with more loans. The EU has said it will give Greece its second massive bail-out in as many years if the embattled country’s politicians pass strict new austerity legislation next week.

Ahead of Monday Meeting in Rome, Banks Suggest Rolling Over Some Bonds

Efforts to get private investors to provide help to a new bailout for Greece intensified, as French banks proposed a plan to reinvest half the proceeds from maturing Greek government bonds and key players prepared for a meeting in Rome on Monday aimed at discouraging bondholders from rushing for the exits.

The French proposal, which will feature in the Rome discussions, is the first to come from the private sector as a response to demands that private creditors play a role in resolving Greece's debt problems.It suggests, for the first time, that private creditors may be ready to contribute significant sums to Greece's financing needs—but it doesn't answer the looming question of whether the price of doing so would be a default on some Greek government bonds.

Rating firms are likely to declare a default if they view investors as being encouraged to take a deal that hurts their interests, even if they are ostensibly doing it voluntarily. The European Central Bank has warned it will turn down Greek debt as collateral for ECB loans in the event of any default, an action that could lead to a collapse of Greece's banking system.

The developments come ahead of critical votes in the Greek parliament this week on an unpopular austerity and privatization program that is the price for more aid from its fellow members of the 17-nation euro zone and the International Monetary Fund. If it goes through, euro-zone governments are set to discuss, and possibly finalize, terms of a new Greek bailout in July—but negotiations could drag on longer.

Germany and other official lenders to Greece have been insisting that if they are going to contribute more money to a new Greek bailout, likely to exceed €100 billion ($142 billion), they don't want large sums going straight out the door to pay off bondholders. In the next three years, some €64 billion of Greek government bonds come due for repayment. After weeks of wrangling over how to limit this risk, governments decided that any private participation should be "voluntary."

Since that agreement, behind-the-scenes talks about how to achieve this have intensified, involving the Institute of International Finance, a Washington-based group comprising more than 400 banks and financial institutions worldwide. Its managing director, Charles Dallara, will be at the meeting Monday, according to a spokesman for the IIF. Expected to attend the meeting, hosted by Italy's largest bank, Intesa Sanpaolo SpA, in Rome, are representatives from banks, insurance companies, and officials from the Greek and other European governments, as well as from the European Union and the European Central Bank.

The French proposal calls for half of the proceeds from maturing Greek bonds to be reinvested in new 30-year Greek bonds. A further fifth of the proceeds would be invested in high-quality bonds—presumably, for French banks, these would be French Treasury bonds—as insurance to guarantee repayment after 30 years. French government officials said the plan drafted by French banks provided an "interesting solution" that was "worth exploring." European governments have said they want private creditors to roll over as much as €30 billion worth of Greek government bonds.

The proposal, which emerged from a meeting Friday of French banks, has echoes of the Brady Plan of the late 1980s, where U.S. Treasury zero-coupon bonds were purchased to provide guarantees of repayment at maturity by government borrowers in Latin America. Under the Brady Plan, however, the borrowing government financed the guarantees: The proposal from the French banks suggests the lenders would provide financing for their own guarantees.

France has a particular interest in finding a solution for Greece because French banks are more exposed to Greek borrowers than are banks of any other country outside Greece. German banks hold more sovereign debt than the French—$23 billion versus $15 billion, according to figures from the Bank for International Settlements. Much of the German exposure, however, is to state-owned banks and funds, while two large French banks—Société Générale SA and Crédit Agricole SA—also have controlling stakes in Greek banks, meaning they are exposed via their subsidiaries.

Someone due to attend Monday's meeting said the French proposal was one of a number of options being looked at for private-sector participation in the new Greek bailout. He said the Rome meeting would try to develop a framework, but agreement on detailed proposals would take more time. He said it is likely that Greek bondholders would be given several options for participation.

Moody's Investors Service earlier this month put the three largest French banks by market value—Société Générale, Crédit Agricole and BNP Paribas SA—on review for downgrade because of their Greece exposure and the possibility that the banks' portfolios might lose value. The banks have all said recently that their exposure to Greece remains manageable, and analysts say they are at risk for only small declines in their capital buffers.

The issue is fraught with legal and accounting complications for participating banks, depending on whether the bonds are held for trading or being held to maturity. Bankers are also concerned that different national accounting and valuation rules could lead to identical bank decisions being treated very differently from country to country, leading to different impacts on profits . Accountants and lawyers will also be represented at the meeting.

One group that won't attend is the rating firms. They were criticized for their active involvement with issuers and investors in structuring products in the U.S. that intensified the financial crisis, and don't want to participate directly in discussions in structuring private-sector participation in a rollover of Greek debts.

That may be significant. Most ways of getting a substantial private-sector contribution in the Greek bailout, even if they are dubbed voluntary, would likely be classified as a default by rating firms because the measures would be deemed to harm creditors. Technically, if this happened, the bonds involved would be declared in default and Greece itself would be classified as in "selective default," because it would still be servicing some bonds.

The ECB has been steadfast in opposing any private-sector deal that would hand Greece a default rating. "No credit events, no selective default," ECB President Jean-Claude Trichet said on June 9. "We exclude all concepts that are not purely voluntarily or that have an element of compulsion."

A top ECB official over the weekend suggested that even agreements officially touted as voluntary may not be acceptable. "The question is also whether [voluntary private-sector involvement] will lead to a credit event on the market for credit default swaps, and whether the ratings agencies will downgrade the rating to selective default or default," ECB board member Jürgen Stark said in an interview published Saturday with Frankfurter Allgemeine Zeitung.

Billionaire investor George Soros said it’s "probably inevitable" that a mechanism will be put in place to allow weaker economies to exit the euro. "There’s no arrangement for any countries leaving the euro, which in current circumstances is probably inevitable," Soros, 80, said at a panel discussion in Vienna yesterday on whether liberal democracy is at risk in Europe. "We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread. The financial system remains extremely vulnerable."

Concern Greek lawmakers will fail to pass austerity measures to ensure the next installment of the nation’s bailout is roiling global markets and pushed the euro to a record-low against the Swiss franc last week. Greece is one of three euro- region members to have sought international bailouts amid the sovereign debt crisis. "I think most of us actually agree that" Europe’s crisis "is actually centered around the euro," said Soros. "It’s a kind of financial crisis that is really developing. It’s foreseen. Most people realize it. It’s still developing. The authorities are actually engaged in buying time. And yet time is working against them," he said.

The euro was created in 1999, with 11 member states -- Germany, France, Italy, Belgium, the Netherlands, Luxembourg, Finland, Austria, Portugal, Spain and Ireland. Greece was the 12th country to adopt the shared currency in 2001, while Estonia is the newest member of the euro region, joining this January.

Winning BetThe euro erased its decline versus the dollar to trade little changed at $1.4191 as of 10:14 a.m. in London. The 17- member common currency earlier slid as much as 0.6 percent to $1.4103, the weakest since June 16. Soros is chairman of Soros Fund Management LLC, which has about $28 billion in assets. He’s best known for reportedly making $1 billion in 1992 on a bet that the U.K. would fail to keep the pound in the European exchange-rate system that pre- dated the euro.

He also expressed concern the currency union would dissolve on Jan. 26 at the World Economic Forum in Davos, Switzerland. He said then that European policy makers must address their two- speed economy or risk the euro collapsing, though he added this was unlikely to occur.

'Plan B'European Union leaders have vowed to stand behind Greek as long as Prime Minister George Papandreou, who won a confidence vote last week, pushes through his 78 billion-euro ($111 billion) package of budget cuts and asset sales. Investors are concerned a default would trigger contagion that would engulf other euro-region members including Ireland, Portugal and Spain.

Europe’s leaders should look for alternative strategies to solve the debt crisis, Soros told the Vienna panel, which also included Former Belgian Premier Guy Verhofstadt. Because the "survival of the EU is of vital interest to us all," there’s a need for a "Plan B," he said, explaining that this could include EU-wide taxes, a "banking system guaranteed by European institutions, not a bunch of national banking systems," or a financial transaction tax.

"You need a Plan B and there’s no Plan B at the moment," Soros said. Instead, "authorities are sticking to the status quo" and not "recognizing that there are fundamental flaws that need to be corrected," he said.

Lloyds Banking Group’s exposure to the riskiest kind of mortgages is more than double that of any of its top five rivals in what is potentially a ticking time bomb for Britain’s largest high-street lender. Data published last week by the Bank of England showed that loans representing more than a quarter of Lloyds’ mortgage book are worth at least 90 per cent of the property value they are secured against.

By contrast, up to 12 per cent of loans provided by Royal Bank of Scotland and Santander have a similarly high loan to value, while Nationwide, Barclays and HSBC have a smaller proportion of such risky loans. The danger of these kinds of loans is that home buyers who make insignificant deposits are considered more likely to fall into arrears. High loan-to-value ratios also pose the risk of bigger losses if borrowers default.

Previous analysis from Standard & Poor’s, the credit rating agency, found that a borrower with a 10 per cent deposit was roughly twice as likely to fall into arrears as one putting down 30 to 40 per cent. In total, 60 per cent of Lloyds’ secured debt book – which includes mortgages to individuals and businesses – has a loan to value deemed high or very high by the Bank of England, compared with 38 per cent for RBS, 33 per cent for Santander, and just 6 per cent for HSBC.

About 13 per cent of Lloyds’ £340bn mortgage book – £45bn of loans – exceed the value of the property they are secured upon. The actual number of borrowers in negative equity, where their property is worth less than their loan, is much smaller, at about 5 per cent. The figures show how vulnerable Lloyds is to a further souring of the UK economy, particularly another fall in house prices.

They also illustrate the challenges faced by António Horta-Osório, the new chief executive, who will present his initial strategic review to investors this week. Analysts said the concern was that a riskier loan book would push up funding costs for the bank just as it is attempting to boost returns. "This increases the worry about the quality of Lloyds’ assets and the potential of loan losses to come," said Ronit Ghose, an analyst at Citigroup.

Lloyds emphasised that negative equity only became a real concern for borrowers if they needed to move house and said it had a range of mortgage products to assist these customers. It expected the loan-to-value position to be stable, although it forecasts a 2 per cent fall in house prices this year, as it believes they will rise by the same amount in 2012.

Analysts estimate that as much as three-quarters of Lloyds’ risky mortgage book was inherited from HBOS, which was one of the most aggressive lenders during the property boom.

'The euro's dead. Long live Germany!" was the uber-nationalist cry earlier this month from top German lawyer, Markus Kerber. He's currently suing the German government in an attempt to stop it 'bailing out' bankrupt neighbours, starting with Greece and then going on to Ireland, Portugal, Italy, Greece and Spain -- none of which he believes is a 'worthy member' of the Eurozone.

He's not alone. Market analyst and author Michael Mross is among the experts who say the Germans are at boiling point. "If the problems of the euro become more and more, bigger and bigger, higher and higher, it's not excluded [that] German people [will] go on the street and say we don't want to pay any more," he warns.

The Germans are angry. Perhaps rightly so -- as one Frankfurter said: "We're just certainly not responsible for the debts and the deficit run in Portugal, Greece, in the 'PIGS' states." Maybe they are, maybe they aren't, maybe it's a bit of both; but a glance at history shows that Germany still has a debt to pay her fellow Europeans.

In an interview published last Thursday in Spiegel online, economic historian Albrecht Ritschl argued that Germany -- not Greece or Ireland or any of the so-called 'Pigs' -- has been by far the worst debtor nation of the past century, and the one shown most debt forgiveness by its neighbours.

Ritschl reminded his interviewer, "In the 20th Century, Germany started two world wars [okay, the first is debatable], the second of which was conducted as a war of annihilation and extermination, and subsequently its enemies waived its reparations payments completely or to a considerable extent. "For Germany, that was a life-saving gesture, and it was the actual financial basis of the economic miracle (that began in the Fifties). But it also meant that the victims of the German occupation in Europe also had to forgo reparations, including the Greeks."

Ah, the Greeks who reluctantly had to bear gifts. "No one in Greece has forgotten that Germany owes its economic prosperity to the grace of other nations," says Ritschl. So it seems.

When the Germans accuse them of having lied about their deficit and debt, and insist that Greece is well known for corruption and not paying taxes, the Greeks repeat the accusations made by their Deputy Prime Minister Theodoros Pangalos last year when he said (in an interview with BBC): "They [the German government] shouldn't complain much about stealing and not being very specific about economic dealings [from Greece]."

Now, why would that be, Mr Pangalos? Why? Because, says he: "They [the Nazis] took away the Greek gold that was in the Bank of Greece, they took away the Greek money and they never gave it back." Oh dear, wars have been fought for less.

And Mr Pangalos isn't the only one who thinks German policy is destroying the European union. Two weeks ago, billionaire George Soros told German weekly Die Zeit, "German policy is a danger for Europe, it could destroy the European project."

And things really don't seem to be looking too good for the technocratic Euro-philes who hoped that a monetary union (without fiscal union) would prove unworkable (as it has) and inevitably lead to a Federal United States of Europe. Was this -- as some cynics suspect -- their plan all along? If it was, they forgot to factor in a defensive backslide into nationalist politics by countries hit by unemployment, little economic growth and a growing sense of injustice.

As Soros said: "Right now the Germans are dragging their neighbours into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk."

He could very well be right. Protectionism is once again part of the new anti-EU agenda. And of course, it's not just the Germans. In France -- as in much of the rest of Europe -- the far right is appealing to disillusioned citizens, meaning President Nicolas Sarkozy has to adopt a more protectionist, nationalist stance to attract these voters.

Last month, following disputes between France and Italy over Italy permitting North African immigrants to travel through Italy and into France, the European Council of Ministers agreed to debate proposals to restore passport controls to people travelling from one EU country to another. As reported in Marketwatch last week, this strikes at the heart of the whole idea of free movement through the EU. And in Denmark, the Liberal minority government was recently forced to introduce passport checks to maintain its parliamentary majority support from the anti-immigrant Danish People's Party.

What's next? Tariffs? Trade wars? An invasion by men in suits who will conquer and control us with private bank debts? Oh, we've already had that.

The only thing that can save the euro now -- and possibly the entire European project -- is federalisation. And that just ain't going to happen. No one -- certainly not Germany -- wants to pay for a new Marshall Plan. But without it, Greece will default, followed by Ireland, Portugal, Spain... and on and on it will go. And where it will stop, nobody knows.

Ironically, just when Europe needs to pull tighter together to prevent self-serving nationalism and vengeful social unrest occurring, political thinking and public sentiment is set on doing the exact opposite. The sabre-rattling European powers are playing a very dangerous game.

The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn. More than half the managers, who were polled by UBS, predicted that the dollar would be replaced by a portfolio of currencies within the next 25 years.

That marks a departure from previous years, when the central bank reserve managers have said the dollar would retain its status as the sole reserve currency. UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.

The results are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet. "Right now there is great concern out there around the financial trajectory that the US is on," said Larry Hatheway, chief economist at UBS.

The US currency has slid 5 per cent so far this year, and is trading close to its lowest ever level against a basket of the world’s major currencies. Holders of large reserves, most notably China, have been diversifying away from the dollar. In the first four months of this year, three quarters of the $200bn expansion in China’s foreign exchange reserves was invested in non-US dollar assets, Standard Chartered estimates.

The prediction of a multipolar currency world replacing the current dollar dominance chimes with the thinking of some leading policymakers. Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy. The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.

Global interest rates must rise to avoid high inflation becoming entrenched, the Bank for International Settlements said on Sunday. It also warned that delaying deficit cuts could risk intensifying the sovereign debt crisis and have grave consequences were investors to lose confidence in a major economy such as the United States.

"With the arrival of sharper price increases for food, energy and other commodities, inflation has become a global concern," the BIS said in its annual report. "Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks."

Of the four major central banks, the European Central Bank is the only one which has raised rates since the intensification of the financial crisis in late 2008. Central banks may have to raise rates at a faster pace than previously, BIS said, adding that as long as global growth is robust, food and commodity prices may remain high or even rise further.

The Group of 20 economic powers agreed in Paris on Thursday to tackle high food prices by boosting farm output, food market transparency and policy coordination, after world food prices hit a record high earlier this year.

The deal is another sign that global policymakers are reaching beyond traditional economic policy tools to sustain global growth, which has shown signs of slowdown in recent months. BIS said inflation expectations suggest central banks' long-term credibility has so far survived the inflation surge, but added that rates have to rise to ensure this anchoring.

"The great danger is that long-term inflation expectations will start to climb, and current price developments and policy stances are sending us in the wrong direction." The annual report also said the Bank of England should think about tightening its policy in the face of high inflation. "In the United Kingdom, CPI inflation had exceeded the Bank of England's 2 percent target since December 2009," it said. "As yet, there has been no move by the Monetary Policy Committee, but one wonders how long its current policy can be sustained."

Fiscal TighteningTurning to fiscal policies, the BIS said that a major economy being drawn into the debt crisis could have catastrophic consequences. "We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy," it said. "The time for public and private consolidation is now."

It added that markets might not continue to view U.S. public debt as favorably as now were it to continue carrying heavy deficits. "The current ability of the United States to easily finance its deficit cannot be taken for granted. Past examples of a number of smaller economies in deficit suggest that market confidence can evaporate quickly, forcing sudden and costly adjustment."

Emerging countries should do their part to reduce global imbalances by easing exchange rate pegs, the BIS said, adding that China should let the yuan appreciate against the dollar. "The large costs of monetary instability mean that adjustment should principally work through more flexible nominal exchange rates," the report said.

"In the case of the United States and China, the costs of that adjustment would probably fall mostly on China." The BIS also said that while extremely low interest rates help commercial banks, they can delay necessary action. "At the same time as ultra-low interest rates have given banks the breathing space to take the necessary actions, they have weakened incentives to pursue the clean-up," the report said.

"When banks are not forced to write down loans, they are actually provided with incentives to "evergreen", i.e.. to roll over non-performing loans to firms that should have been bankrupt."

For a large number of young adults in Britain, homeownership has become increasingly difficult to achieve, viewed as a distant goal attainable only later in life, if at all.

That is a significant shift for a country where owning a home remains deeply rooted in the culture. Owners occupy a higher percentage of homes in Britain than in the United States, France or Germany.

But as the pain of government-imposed austerity sinks in, disposable income has shrunk and loan requirements have toughened, forcing more and more Britons into renting rather than buying. The average age of first-time buyers is now 31, up from 28 five years ago, and the number of people renting has increased sharply, signs that the boom in homeownership that began under Margaret Thatcher’s government 30 years ago is starting to reverse.

Some economists are concerned that as more people are forced to wait to buy a home, the country’s wealth gap could widen, endangering the retirement prospects for a swelling group of young adults they call "generation rent."

Charlotte Ashton, 30, has lived in rented accommodations ever since she left her parent’s home to attend university. She said she was happy sharing a five-bedroom house in the Shepherds Bush area of London with four other women but was saving for a down payment to buy her own home. "I do believe in the fundamentals of owning bricks and mortar as security for the future, more than leaving my money in the banks at a low interest rate," said Ms. Ashton, who works in public relations. "Unless you have a very well paid job and are willing to save every penny, it’s unfeasible to buy without the help of the bank of Mum and Dad."

About four years ago, a first-time buyer had to raise an average down payment equal to 41 percent of annual income to buy a property, according to the Council of Mortgage Lenders. Now it is more than 87 percent of income, or about £26,500 ($42,800). And while banks were willing to make mortgage loans for more than the value of the house before the credit crisis, buyers now find they must put up at least 10 percent, and often substantially more. (The average deposit for first-time buyers is 23 percent, according to the price comparison Web site Moneysupermarket).

A study by Halifax, a British mortgage lender, showed last month that while 77 percent of 20 to 45 year-olds who were currently renting would like to buy a home, more than two-thirds believed they had no prospect of doing so. Only 5 percent said they were managing to save toward a deposit. Those who do save, like Ms. Ashton, who has set aside the equivalent of about $50,000, are unlikely to be able to afford a home in the same area they rent in. "I would have to look further out of London or for a smaller property," she said. So for now, like many, she is staying put.

One reason homeownership remains attractive in Britain is because property values dropped less drastically than in the United States, in part because of a shortage in housing. Prices in some large cities, including London, have even increased recently. People still perceive a home to be a better and safer investment than a pension fund, said Andrew Hull, research fellow at the Institute for Public Policy Research. "Homeownership is also culturally entrenched," he said. "Owning a home is the main way of showing you made it."

The big shift toward homeownership came in the 1980s with Mrs. Thatcher’s right-to-buy policy, which allowed many in rented government housing to buy their homes. About two million homes were sold, earning the government tens of billions of pounds.

At the same time, the rental market became increasingly unattractive. Unlike Germany and other Continental European countries, Britain’s private rental market is highly fragmented, with many landlords, and laws that generally favor the property owner. Most leases are for six months only, with landlords rarely agreeing to commit to longer terms; this makes renting highly insecure.

But the aftermath of the banking crisis and the recession made buying more difficult. Over the last 10 years the number of people who owned homes here dropped to 67 percent from 70 percent. Meanwhile, the number of people in private rented housing rose to 16 percent from 10 percent over the same period, according to the Office for National Statistics.

"A growing number of young would-be buyers are preparing for lifelong renting — by necessity rather than choice," said Jonathan Moore, director of easyroommate.co.uk, a property Web site. Katherine Fyfe is one of them. Ms. Fyfe, a 42-year-old clinical systems teacher for the National Health Service in Devon, is eager to buy her own place, but her £15,000 in savings is not enough. "I’ve been clawing money together since my divorce in 2008, but it’s not been easy as the cost of rent has bitten into most of my pay," she said. She pays £380 a month for a room in a house in Exeter that she shares with two others.

Rising demand has pushed up rents by an average of 4.4 percent over the last year, according to LSL Property Services. In London rents increased 7.8 percent. Being unable to buy a home is just the latest blow for a British populace already battered by severe austerity and contraction. To reduce debt, the government is cutting pensions, welfare spending and public services, and has said it will eliminate 310,000 public-sector jobs by 2015.

Amid this economic hardship, some analysts warn that a wider shift toward renting could have adverse effects on society as a whole. "It could open up a widening of the wealth gap that already exists between homeowners and non homeowners, and people in ‘generation rent’ risk insufficient finances at retirement," Alison Blackwell, a research director at the National Center for Social Research and author of the Halifax report, said.

It could also have implications for the cohesion of neighborhoods, she said. Renters tend to be less involved in local communities because they are forced to move more often. And the economy as a whole may suffer because renters tend to curb spending to save for a deposit. For some, including Ms. Ashton, the prospect of buying in Britain seems so daunting that she even considered buying a property elsewhere. "I don’t rule out buying abroad," she said. "There are many more appealing markets than Britain. Florida, for example."

Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.

In the e-mails, energy executives, industry lawyers, state geologists and market analysts voice skepticism about lofty forecasts and question whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves. Many of these e-mails also suggest a view that is in stark contrast to more bullish public comments made by the industry, in much the same way that insiders have raised doubts about previous financial bubbles.

"Money is pouring in" from investors even though shale gas is "inherently unprofitable," an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. "Reminds you of dot-coms." "The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work," an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.

Company data for more than 10,000 wells in three major shale gas formations raise further questions about the industry’s prospects. There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted.

The data show that while there are some very active wells, they are often surrounded by vast zones of less-productive wells that in some cases cost more to drill and operate than the gas they produce is worth. Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long run.

If the industry does not live up to expectations, the impact will be felt widely. Federal and state lawmakers are considering drastically increasing subsidies for the natural gas business in the hope that it will provide low-cost energy for decades to come. But if natural gas ultimately proves more expensive to extract from the ground than has been predicted, landowners, investors and lenders could see their investments falter, while consumers will pay a price in higher electricity and home heating bills.

There are implications for the environment, too. The technology used to get gas flowing out of the ground — called hydraulic fracturing, or hydrofracking — can require over a million gallons of water per well, and some of that water must be disposed of because it becomes contaminated by the process. If shale gas wells fade faster than expected, energy companies will have to drill more wells or hydrofrack them more often, resulting in more toxic waste.

The e-mails were obtained through open-records requests or provided to The New York Times by industry consultants and analysts who say they believe that the public perception of shale gas does not match reality; names and identifying information were redacted to protect these people, who were not authorized to communicate publicly. In the e-mails, some people within the industry voice grave concerns.

"And now these corporate giants are having an Enron moment," a retired geologist from a major oil and gas company wrote in a February e-mail about other companies invested in shale gas. "They want to bend light to hide the truth."

Others within the industry remain optimistic. They argue that shale gas economics will improve as the price of gas rises, technology evolves and demand for gas grows with help from increased federal subsidies being considered by Congress. "Shale gas supply is only going to increase," Steven C. Dixon, executive vice president of Chesapeake Energy, said at an energy industry conference in April in response to skepticism about well performance.

Studying the Data"I think we have a big problem." Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas, recalled saying that in a May 2010 conversation with a senior economist at the Reserve, Mine K. Yucel. "We need to take a close look at this right away," she added.

A former stockbroker with Merrill Lynch, Ms. Rogers said she started studying well data from shale companies in October 2009 after attending a speech by the chief executive of Chesapeake, Aubrey K. McClendon. The math was not adding up, Ms. Rogers said. Her research showed that wells were petering out faster than expected. "These wells are depleting so quickly that the operators are in an expensive game of ‘catch-up,’ " Ms. Rogers wrote in an e-mail on Nov. 17, 2009, to a petroleum geologist in Houston, who wrote back that he agreed. "This could have profound consequences for our local economy," she explained in the e-mail.

Fort Worth residents were already reeling from the sudden reversal of fortune for the natural gas industry. In early 2008, energy companies were scrambling in Fort Worth to get residents to lease their land for drilling as they searched for so-called monster wells. Billboards along the highways stoked the boom-time excitement: "If you don’t have a gas lease, get one!" Oil and gas companies were in a fierce bidding war for drilling rights, offering people bonuses as high as $27,500 per acre for signing leases.

The actor Tommy Lee Jones signed on as a pitchman for Chesapeake, one of the largest shale gas companies. "The extremely long-term benefits include new jobs and capital investment and royalties and revenues that pay for public roads, schools and parks," he said in one television advertisement about drilling in the Barnett shale in and around Fort Worth.

To investors, shale companies had a more sophisticated pitch. With better technology, they had refined a "manufacturing model," they said, that would allow them to drop a well virtually anywhere in certain parts of a shale formation and expect long-lasting returns. For Wall Street, this was the holy grail: a low-risk and high-profit proposition. But by late 2008, the recession took hold and the price of natural gas plunged by nearly two-thirds, throwing the drilling companies’ business model into a tailspin.

In Texas, the advertisements featuring Mr. Jones disappeared. Energy companies rescinded high-priced lease offers to thousands of residents, which prompted class-action lawsuits. Royalty checks dwindled. Tax receipts fell. The impact of the downturn was immediate for many. "Ruinous, that’s how I’d describe it," said the Rev. Kyev Tatum, president of the Fort Worth chapter of the Southern Christian Leadership Conference.

Mr. Tatum explained that dozens of black churches in Fort Worth signed leases on the promise of big money. Instead, some churches were told that their land may no longer be tax exempt even though they had yet to make any royalties on the wells, he said. That boom-and-bust volatility had raised eyebrows among people like Ms. Rogers, as well as energy analysts and geologists, who started looking closely at the data on wells’ performance.

In May 2010, the Federal Reserve Bank of Dallas called a meeting to discuss the matter after prodding from Ms. Rogers. One speaker was Kenneth B. Medlock III, an energy expert at Rice University, who described a promising future for the shale gas industry in the United States. When he was done, Ms. Rogers peppered him with questions. Might growing environmental concerns raise the cost of doing business? If wells were dying off faster than predicted, how many new wells would need to be drilled to meet projections?

Mr. Medlock conceded that production in the Barnett shale formation — or "play," in industry jargon — was indeed flat and would probably soon decline. "Activity will shift toward other plays because the returns there are higher," he predicted. Ms. Rogers turned to the other commissioners to see if they shared her skepticism, but she said she saw only blank stares.

Bubbling DoubtsSome doubts about the industry are being raised by people who work inside energy companies, too. "Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable," wrote a geologist at Chesapeake in a March 17 e-mail to a federal energy analyst. "In fact I’m quite skeptical of it myself when you see the % decline in the first year of production."

"In these shale gas plays no well is really economic right now," the geologist said in a previous e-mail to the same official on March 16. "They are all losing a little money or only making a little bit of money." Around the same time the geologist sent the e-mail, Mr. McClendon, Chesapeake’s chief executive, told investors, "It’s time to get bullish on natural gas."

In September 2009, a geologist from ConocoPhillips, one of the largest producers of natural gas in the Barnett shale, warned in an e-mail to a colleague that shale gas might end up as "the world’s largest uneconomic field." About six months later, the company’s chief executive, James J. Mulva, described natural gas as "nature’s gift," adding that "rather than being expensive, shale gas is often the low-cost source." Asked about the e-mail, John C. Roper, a spokesman for ConocoPhillips, said he absolutely believed that shale gas is economically viable.

A big attraction for investors is the increasing size of the gas reserves that some companies are reporting. Reserves — in effect, the amount of gas that a company says it can feasibly access from its wells — are important because they are a central measure of an oil and gas company’s value.

Forecasting these reserves is a tricky science. Early predictions are sometimes lowered because of drops in gas prices, as happened in 2008. Intentionally overbooking reserves, however, is illegal because it misleads investors. Industry e-mails, mostly from 2009 and later, include language from oil and gas executives questioning whether other energy companies are doing just that.

The e-mails do not explicitly accuse any companies of breaking the law. But the number of e-mails, the seniority of the people writing them, the variety of positions they hold and the language they use — including comparisons to Ponzi schemes and attempts to "con" Wall Street — suggest that questions about the shale gas industry exist in many corners. "Do you think that there may be something suspicious going with the public companies in regard to booking shale reserves?" a senior official from Ivy Energy, an investment firm specializing in the energy sector, wrote in a 2009 e-mail.

A former Enron executive wrote in 2009 while working at an energy company: "I wonder when they will start telling people these wells are just not what they thought they were going to be?" He added that the behavior of shale gas companies reminded him of what he saw when he worked at Enron.

Production data, provided by companies to state regulators and reviewed by The Times, show that many wells are not performing as the industry expected. In three major shale formations — the Barnett in Texas, the Haynesville in East Texas and Louisiana and the Fayetteville, across Arkansas — less than 20 percent of the area heralded by companies as productive is emerging as likely to be profitable under current market conditions, according to the data and industry analysts.

Richard K. Stoneburner, president and chief operating officer of Petrohawk Energy, said that looking at entire shale formations was misleading because some companies drilled only in the best areas or had lower costs. "Outside those areas, you can drill a lot of wells that will never live up to expectations," he added.

Although energy companies routinely project that shale gas wells will produce gas at a reasonable rate for anywhere from 20 to 65 years, these companies have been making such predictions based on limited data and a certain amount of guesswork, since shale drilling is a relatively new practice. Most gas companies claim that production will drop sharply after the first few years but then level off, allowing most wells to produce gas for decades.

Gas production data reviewed by The Times suggest that many wells in shale gas fields do not level off the way many companies predict but instead decline steadily. "This kind of data is making it harder and harder to deny that the shale gas revolution is being oversold," said Art Berman, a Houston-based geologist who worked for two decades at Amoco and has been one of the most vocal skeptics of shale gas economics.

The Barnett shale, which has the longest production history, provides the most reliable case study for predicting future shale gas potential. The data suggest that if the wells’ production continues to decline in the current manner, many will become financially unviable within 10 to 15 years.

A review of more than 9,000 wells, using data from 2003 to 2009, shows that — based on widely used industry assumptions about the market price of gas and the cost of drilling and operating a well — less than 10 percent of the wells had recouped their estimated costs by the time they were seven years old.

Terry Engelder, a professor of geosciences at Pennsylvania State University, said the debate over long-term well performance was far from resolved. The Haynesville shale has not lived up to early expectations, he said, but industry projections have become more accurate and some wells in the Marcellus shale, which stretches from Virginia to New York, are outperforming expectations.

A Sense of ConfidenceMany people within the industry remain confident. "I wouldn’t worry about these shale companies," said T. Boone Pickens, the oil and gas industry executive, adding that he believes that if prices rise, shale gas companies will make good money. Mr. Pickens said that technological improvements — including hydrofracking wells more than once — are already making production more cost-effective, which is why some major companies like ExxonMobil have recently bought into shale gas.

Shale companies are also adjusting their strategies to make money by focusing on shale wells that produce lucrative liquids, like propane and butane, in addition to natural gas. Asked about the e-mails from the Chesapeake geologist casting doubt on company projections, a Chesapeake spokesman, Jim Gipson, said the company was fully confident that a majority of wells would be productive for 30 years or more.

David Pendery, a spokesman for IHS, added that though shale gas prospects had previously been debated by many analysts, in more recent years costs had fallen and technology had improved.

Still, in private exchanges, many industry insiders are skeptical, even cynical, about the industry’s pronouncements. "All about making money," an official from Schlumberger, an oil and gas services company, wrote in a July 2010 e-mail to a former federal regulator about drilling a well in Europe, where some United States shale companies are hunting for better market opportunities.

"Looks like crap," the Schlumberger official wrote about the well’s performance, according to the regulator, "but operator will flip it based on ‘potential’ and make some money on it."